The AEGIS Hedging Solutions' Interest Rate Advisory team is committed to updating you with all the new developments on the pending cessation and transition away from LIBOR, scheduled for the end of 2021. There were two major events that have occurred recently.
First, ISDA has finally released their long-awaited fallback protocol (the "2020 IBOR Fallbacks Protocol") along with the associated amendments to their 2006 Definitions. These were developed to provide for fallback provisions to replace currently applied reference rates that are scheduled to no longer be calculated and published after 2021. Fallback provisions are essentially instructions on how to transition to the chosen replacement reference rates for various IBOR indices in various currencies. For USD LIBOR, the chosen replacement rate is the Secured Overnight Funding Rate, or "SOFR". For legacy
derivative transactions that reference USD LIBOR, ISDA calls for a spread to be applied to
daily compounded SOFR to make the revised transaction as equivalent as possible to the counterparties' respective positions of value prior to the transition. This spread is meant to compensate for the difference in SOFR, a risk-free rate that is collateralized with U.S. Treasuries, versus USD LIBOR, a rate that is inclusive of the credit risk in banks' funding costs. Both derivatives counterparties will have to adhere to this ISDA protocol for the newly updated ISDA definitions' fallback provisions to be applicable.
Second, New York State Senator Kevin Thomas, the chair of the state's Senate Consumer Protection Committee, introduced a bill in the Albany legislature that would establish a fallback benchmark tied to USD LIBOR. This is a key event as most of the $2 trillion in financial contracts that reference USD LIBOR are governed under New York commercial laws which currently do not provide for any fallback provisions in the case of the cessation of LIBOR. It is possible that many USD LIBOR based transactions, whether they be derivatives or other financial transactions (in the majority of your cases, loans) could potentially have to rely on New York law as a last resort to any unresolved LIBOR transition disputes with your financial counterparty(ies). This bill, which does not currently have a sponsor in New York legislature's lower house, must make it through both chambers, that are in recess until January, and then signed by the governor to become law.
For more information on the cessation and transition away from LIBOR, and further detail and links regarding these new updates, please visit the AEGIS LIBOR Transition FAQs post here.
If you have any questions, concerns, or issues with anything regarding this set of events or anything you read in the post, please email rates@aegis-hedging.com.