The transition from Interbank Offered Rates (IBOR) to Alternative Risk-Free Rates (RFRs) has an impact on all financial and non-financial institutions operating with the impacted floating reference rates. It affects a wide range of financial instruments on the derivative and cash markets.

This blog edition highlights notable developments made publicly available by the global regulatory community, industry working groups and/or infrastructure providers over the month of February 2021. You will find more detail in our monthly EY IBOR Transition Newsletter, to which you may subscribe through the following link.

With only 300 days to go until the end of 2021, time is running out for LIBOR transition

In Switzerland, according to the FINMA roadmap, there should now be no new tough legacy, the Swiss banks should now be ready to grant loans based on RFRs and should have defined the plan to reduce the existing “tough legacy” by the end of March. While waiting for the cessation date(s) announcements, the industry is getting ready through an increasing number of initiatives.

The National Working Group on CHF Reference Interest Rates (CHF NWG) recently published the “Rate Switch Amendment Agreement” for syndicated loans. The latter is based on the recommended standard for the Swiss market. On top of this, the number of Swiss banks offering SARON mortgages is increasing with Bank CIC, Bank Gantrisch, Regiobank Männedorf, Spar+Leihkasse Gürbetal, Postfinance, Valiant, Bank CIC, Berner KB and Regiobank Solothurn AG, Urner KB having all announced to join the movement.

In the European market, regulators and institutions took important initiatives this month. The Council of the European Union (EU Council) adopted amendments to the EU Benchmark Regulation (BMR) addressing the termination of financial benchmarks. These amendments came into force on 11 February 2021. The goal of these new rules is to reduce legal uncertainty and avoid risks to financial stability by making sure that a statutory replacement rate can be put in place by the time a systemically important benchmark is no longer in use. Moreover, the European Money Markets Institute (EMMI) published the outcome of the first annual review of the Hybrid Methodology for EURIBOR with amendments to be implemented on 19 April 2021. EMMI also issued a statement urging EONIA users to accelerate their transition to the €STR and to finalize without delay their phasing-out in the few months remaining before the benchmark’s planned cessation on 3 January 2022.

In the English market, the Working Group on Sterling Risk-Free Reference Rates (GBP RFR WG) published various important papers this month:

  • “Transition in Sterling Non-Linear Derivatives referencing GBP LIBOR ISR” setting out a potential methodology using SONIA-based rates which could form a replacement for GBP LIBOR ICE Swap Rate (ISR); 
  • “Path to ending new use of GBP LIBOR-linked derivatives” to support market participants in meeting its upcoming recommended milestones for ending new use of GBP LIBOR in derivatives.

Moreover, GBP RFR WG updated its priorities and roadmap for the final year of transition. That roadmap now captures an end-Q2 2021 recommended milestone for market participants to cease initiation of new GBP LIBOR-linked exchange traded futures and options that expire after the end of 2021, except for risk management of existing positions.

Our Perspective

Looking ahead, key objectives of the organizations should be to:

  • Press ahead with the development of RFR products with the expectation of increasing liquidity over the course of 2021.
  • Accelerate the client outreach that still remains sporadic. While most firm have aims to complete active transition by 2021, there is still much to do.

Swiss highlights:

  • CHF NWG published the “Rate Switch Amendment Agreement”
  • New Swiss banks offering SARON mortgages
  • CHF NWG published minutes of February 2021 meeting
  • Development of SARON

Eurozone specific highlights:

  • EU Council adopted new rules addressing LIBOR cessation
  • EMMI published outcome of the first annual review of the Hybrid Methodology for EURIBOR
  • EMMI issued statement urging EONIA users to accelerate their transition to €STR
  • Regulation amending EU BMR came into force
  • EUR RFR WG published a summary of its responses to its consultation on EURIBOR fallback trigger events
  • EUR RFR WG published a summary of its responses to its consultation on €STR-based
  • ESMA launched consultation on the methodology to calculate a benchmark in exceptional circumstances

International highlights:

  • APLMA endorsed LMA approach to GBP RFR WG “Documentary Recommendation”
  • ISDA published its January 2021 ISDA-Clarus RFR Adoption Indicator
  • IVSC published a perspectives paper “IBOR Reform – A Valuation Guide”
  • LCH published a summary of its consultation on its solutions for outstanding cleared LIBOR contracts
  • ISDA published Supplement 71 to 2006 ISDA Definitions
  • Bloomberg responds to GBP RFR WG’s letter on credit adjustment spread for cash markets

UK specific highlights:

  • FCA Director delivered speech: “Are you ready for life without LIBOR from end-2021?”
  • Investors called on companies to take urgent action and transition their LIBOR-linked bonds
  • GBP RFR WG published January 2021 newsletter
  • UK Government published guidance on the discontinuation of LIBOR
  • GBP RFR WG published a consultation paper on the successor rate to GBP LIBOR in legacy bonds referencing GBP LIBOR
  • UK Finance published guide “Discontinuation of LIBOR – Guide for Banks and Lenders”
  • GBP RFR WG published paper “Transition in Sterling Non-Linear Derivatives referencing GBP LIBOR ISR”
  • UK HM Treasury published consultation paper: Supporting the wind-down of critical benchmarks
  • LMA updated RFR referencing loans’ list
  • GBP RFR WG published paper “Path to ending new use of GBP LIBOR-linked derivatives”
  • UK specific highlights: GBP RFR WG updated its priorities and roadmap
  • GBP RFR WG published GBP Loan Market Question and Answers document
  • GBP RFR WG published Best Practice Guide for GBP Loans

US specific highlights:

  • ARRC released Conventions for SOFR-based intercompany loans to support non-financial corporations through LIBOR transition