LIBOR: Update on industry initiatives and proposed legislation
- October 12, 2020
Private Equity | Kennett Square, PA
SummaryLIBOR transition continues with the announcement of ISDA’s protocol release date, updated language from the ARRC for bilateral business loans, and possible amendments to the EU Benchmarks Regulation to help ease the transition.
The International Swaps and Derivatives Association (ISDA) has announced that it will publish the 2020 IBOR Fallbacks Protocol and amended definitions on October 23, 2020. The Protocol and amended definitions will become effective on January 25, 2021. This announcement closely follows on the heels of a recent announcement by the U.S. Department of Justice granting a favorable business review letter, concluding that “ISDA’s proposed amendments to its standardized documentation are unlikely to harm competition.” The IBOR Fallbacks Protocol will be one option available to market participants seeking to amend multiple legacy derivatives through a single adherence process.
For loans in the U.S., on August 27, 2020, the ARRC released updated model language for bilateral business loans. This follows the updated model language for syndicated loans that the ARRC released on June 30, 2020. With these updated model language examples, the ARRC is hoping to encourage market participants to move towards a “hardwired approach” to the LIBOR transition — using fixed, clearly defined fallback provisions rather than the more time-consuming and flexible amendment approaches. The new ARRC proposed model language also makes notable changes to what rates will apply when LIBOR is unavailable (the fallback waterfall).
Meanwhile, European legislators are discussing making targeted amendments to the 2016 EU Benchmarks Regulation to help facilitate the transition away from LIBOR. The text of an initial proposed draft amendment was released on July 24, 2020. The final form remains uncertain at this time, while negotiations are ongoing on the scope of regulator powers to replace LIBOR in European financial contracts that lack suitable fallback provisions.
Speak to a Chatham expert
Please reach out to the Chatham team if you have questions around the LIBOR transition and its effect on your loans and derivatives documentation.
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.20-0387
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