LIBOR transition timing update — the regulators have spoken
- March 5, 2021
Real Estate | Kennett Square, PA
This piece summarizes a series of public announcements on March 5 regarding the timing of LIBOR cessation. Most notably, one- and three-month USD LIBOR will be published through June 30, 2023, while all non-USD LIBOR settings (GBP, EUR, CHF, JPY) will be published through December 31, 2021. However, it’s possible that the most common USD LIBOR and GBP LIBOR will be published under a “synthetic” methodology beyond those dates.
On March 5, a series of announcements and guidance by the UK Financial Conduct Authority (FCA), the ICE Benchmark Administration (IBA), the International Swaps and Derivatives Association (ISDA), and Bloomberg, answered a number of open questions regarding the timing of the end of publication of all LIBORs. At the same time, these announcements gave rise to new questions that likely will be addressed over the course of 2021. Most notably, one- and three-month USD LIBOR will be published through June 30, 2023, while all GBP LIBOR settings will be published through December 31, 2021. However, it’s possible that the most common USD LIBOR and GBP LIBOR will be published under a “synthetic” methodology beyond those dates.
These announcements do not provide definitive or “across the board” guidance regarding how all loans and derivatives will fall back, and we continue to advise our clients to inventory their loan portfolio to understand the impact (or lack thereof) and to prepare an action plan.
What do the FCA, IBA, ISDA, and Bloomberg announcements mean for LIBOR transition?
These are the most salient points from these announcements:
- After considering the 55 responses to its recent consultation, IBA plans to continue to publish LIBORs as follows:
- To be published through December 31, 2021 (and no longer representative thereafter):
- All settings of Euro (EUR) LIBOR, Swiss franc (CHF) LIBOR, Japanese Yen (JPY) LIBOR, and Sterling (GBP) LIBOR
- One-week and two-month US Dollar (USD) LIBOR
- To be published through June 30, 2023 (and no longer representative thereafter): overnight, one-month, three-month, six-month, and twelve-month USD LIBOR
- To be published through December 31, 2021 (and no longer representative thereafter):
- The FCA plans to consult on whether to compel the IBA to continue to publish LIBOR under a new methodology (i.e., “synthetic” LIBOR), subject to enactment of the Financial Services Bill by Parliament, for the following LIBORs:
- GBP LIBOR: one-, three-, and six-month settings
- JPY LIBOR: one-, three-, and six-month settings through December 30, 2022
- The FCA will “continue to consider” whether to compel IBA to publish synthetic one-, three-, and six-month USD LIBOR beyond June 30, 2023
- The FCA’s Statements of Policy will outline the methodology for IBA to publish synthetic LIBOR, though it generally amounts to the forward-looking term rate of the relevant RFR, plus a spread adjustment as per ISDA (i.e., five-year historical median difference between the IBOR and RFR)
- The FCA would permit the use of synthetic LIBOR in "legacy contracts," rather than new ones, subject to the results of an FCA consultation later in 2021
- In light of these announcements, Bloomberg published ISDA spread adjustments, which will apply to adjusting rate fixings in derivatives that fall back to an alternative index like SONIA
or SOFR, for all impacted LIBORs, including the following:
- GBP LIBOR: one-month (0.0326%); three-month (0.1193%)
- USD LIBOR: one-month (0.11448%); three-month (0.26161%)
What are the main takeaways?
These announcements confirm the expected timetables for continued publication of most USD LIBOR currencies and tenors — most relevant from the perspective of our clients, that GBP LIBOR will be published through the end of this year and that one- and three-month USD LIBOR will be published through mid-2023. They also set the ISDA spread adjustments, which provides more concrete guidance around the calculation of the fallback rate.
With that, they also leave open the possibility of LIBOR’s continued existence for legacy contracts, in some form or fashion. Notably, the FCA has indicated that they “will consult on” continued publication (beyond the end of this year) of “synthetic” LIBOR for various tenors of GBP LIBOR and JPY LIBOR, and that they will “continue to consider” (i.e., not necessarily consult on) whether to do the same for USD LIBOR beyond mid-2023.
What do LIBOR-based borrowers need to do?
We continue to recommend that LIBOR-based borrowers inventory their loan portfolio to understand the impact (or lack thereof), of the cessation event, and to prepare an action plan. While these announcements and guidance seem to answer some questions around timing of LIBOR cessation and setting of spread adjustments, they give rise to other questions around what will constitute a legacy contract and whether synthetic LIBOR will exist after the cessation date. A key point of difference of impact for derivatives and loans is that this announcement further exposes the mismatch between a LIBOR-referenced loan and a LIBOR-referenced derivative. Please reach out to your Chatham contacts to discuss how we can continue to support you through the LIBOR transition.
Announcements and guidance
- IBA: ICE LIBOR Feedback Statement on Consultation on Potential Cessation
- Bloomberg: Announcement - Spread Fixing Event for LIBOR
Still have questions?
Please send a message to the Chatham team if you have questions around the LIBOR transition.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0061
Our featured insights
LIBOR fallbacks in Agency loans and caps
While many new interest rate caps incorporate revised LIBOR fallbacks prepared by ISDA, these fallbacks are not currently incorporated into caps on Freddie Mac and Fannie Mae loans. How will Agency loans and caps be treated as the market transitions from LIBOR?
LIBOR transition: practical issues for UK borrowers
GBP LIBOR will lose its regulatory support at the end of 2021, and its administrator (ICE) is carrying out a consultation on its intention to cease publication of the benchmark. In this piece, we’ll cover some common issues our clients are encountering as we approach GBP LIBOR’s discontinuation.
New LIBOR hedge fallbacks take effect: now what?
As of January 25, updated LIBOR fallbacks take effect for interest rate hedging transactions and existing hedges amended by way of the ISDA 2020 IBOR Fallbacks Protocol. This piece summarizes the mechanics and impacts, and highlights relevant considerations for commercial real estate borrowers.
ISDA’s IBOR Fallbacks Supplement and Protocol for U.S. CRE investors
On Friday, October 23, the International Swaps and Derivatives Association (ISDA) launched the IBOR Fallbacks Supplement and Protocol, which provides a framework for transitioning interest rate derivatives from USD LIBOR to SOFR.
Interest rate swap FAQs for CRE investors
These frequently asked questions address some of the common issues that commercial real estate borrowers face when considering an interest rate swap. These include swap rates and mechanics, prepayment/breakage, documentation, and LIBOR transition.
Chatham executes first Freddie Mac SOFR interest rate cap
On Wednesday, September 9, Chatham executed the first SOFR-indexed interest rate cap on behalf of a commercial real estate (CRE) borrower in conjunction with the closing of a CBRE-originated Freddie Mac financing.
Agency ARM and interest rate cap update
The Agencies are on track to transition to SOFR as an index for floating-rate loans by EOY. Applications for SOFR indexed loans may be seen as early as this month. Liquidity of SOFR interest rate caps is limited but Chatham is optimistic that they will be available for closing these loans.