All Aboard? The LIBOR Train Is Leaving the Station JENNIFER KAFCAS, SUSAN RODRIGUES, DONALD ENSING, BARLOW MANN AND JAMES GELMAN MCGUIREWOODS
With the benchmark London Interbank Offering Rate, or LIBOR, scheduled for replacement at the end of 2021, banks and other market participants in the United States and United Kingdom are preparing for the transition. McGuireWoods partners Donald Ensing, Jennifer Kafcas, Susan Rodriguez, James Gelman, and Barlow Mann are part of the firm’s LIBOR Transition team helping financial institutions with their transition efforts. They assess where the transition stands and key issues facing market participants in the months ahead. CCBJ: Where does LIBOR transition stand and how prepared is the financial industry for this shift? Jennifer Kafcas: LIBOR transition efforts are well underway at most financial institutions and other entities impacted by the transition, but preparedness varies by product type and jurisdiction. The administrator/publisher of the IBOR rates (the ICE Benchmark Administration), and its UK regulator (the UK Financial Conduct Authority, or FCA) confirmed in March of this year that most versions of U.S. dollar (USD) LIBOR (the most commonly used reference rate) will no longer be published after June 30, 2023, but that IBOR rates in all other currencies (Pound Sterling (GBP), Euro (EUR), Swiss Franc (CHF) and Japanese Yen (JPY)) will no longer be published after December 31, 2021. For this reason, we are seeing most institutions really focusing on transitioning multicurrency products completely this year with transition for other USD LIBOR products planned for this fall and next year. Susan Rodriguez: In the U.S., regulators have pushed financial institutions to focus on LIBOR transition efforts by announcing that examiners will be evaluating 42
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progress and will deem it a safety and soundness issue if financial institutions come up short in their planning efforts. In fact, in March 2021, the Federal Reserve in its Supervision and Regulation Letter encouraged examiners to take supervisory action if an institution is not ready to cease issuance of new LIBOR-based contracts by the end of 2021. Financial institutions have heeded this warning and most are on track, but we have seen challenges with deciding on appropriate replacement rates and, for some, dealing with the practical challenges of amending agreements. What trends are you seeing on replacement rates in the marketplace? Kafcas: In the UK, the FCA has been very active in advancing a replacement reference rate for contracts denominated in GBP, so the UK market has been moving earlier and more uniformly to replace GBP LIBOR with the Sterling Overnight Index Average (SONIA). The FCA has required: (i) all financial contracts denominated in GBP entered into after March 31, 2021 to reference SONIA and not GBP LIBOR, (ii) that all legacy GBP LIBOR products should be converted from LIBOR to SONIA (or have robust fallback paths in place) by September 30, 2021 and (iii) financial institutions to be fully prepared for the end of GBP LIBOR by December 31, 2021. Donald Ensing: Progress in the USD LIBOR cash products market has been more of a mixed bag. The Alternative Reference Rates Committee (ARRC) recommended the Secured Overnight Financing Rate (SOFR) as the replacement benchmark rate for USD financial instruments, and the primary U.S. regulatory authorities monitoring LIBOR transition (the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System and the Federal Deposit
