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Clifford Chance

Clifford Chance

IBORs and benchmark reform

Exploring the impact of transitioning from LIBOR and other IBORS

The transition from LIBOR and other IBORs could be the most significant change to financial markets in recent years.

Against a backdrop of regulatory encouragement, participants in the financial markets have been planning and working towards transition away from LIBOR towards alternative risk free rates.

Our experts can help you to understand what this will mean for your transactions and prepare for the future.

Interim Guidance Provided by Revenue Procedure Facilitates LIBOR Transition

The Internal Revenue Service recently issued Revenue Procedure 2020-44, which is intended to facilitate the market's transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates through the adoption of fallback language developed by the Alternative Reference Rates Committee or the International Swaps and Derivatives Association.  This revenue procedure is effective for modifications to contracts occurring on or after October 9, 2020 and before January 1, 2023.  U.S. taxpayers, however, may rely on Revenue Procedure 2020-44 for modifications to contracts occurring before October 9, 2020. Read more about the Interim Guidance Provided by Revenue Procedure Facilitates LIBOR Transition.

ISDA IBOR Fallbacks Supplement and Protocol: Key Considerations

ISDA’s IBOR Fallbacks Supplement and Protocol have been finalised and will be released on 23 October 2020. The IBOR Fallbacks Supplement updates rate options in the 2006 ISDA Definitions to include new risk-free rate fallbacks for the five LIBOR rates together with eight other IBOR benchmarks. The Supplement, when it becomes effective on 25 January 2021, will implement these risk-free rate fallbacks into the terms of new transactions and the Protocol will enable adhering parties to implement these fallbacks into the terms of legacy transactions. The broad scope of the amendments made by the Protocol, the range of agreements it covers and the availability of a series of templates and amendment agreements which can be used to tailor the terms of adherence, confront parties contemplating adherence with a series of challenges. These challenges will require extensive due diligence to be undertaken both with respect to a party’s own documentation and also with respect to each of its counterparties. Moreover, these challenges and the key decisions they entail will need to be addressed in a very limited period of time. Read more about ISDA IBOR Fallbacks Supplement and Protocol: Key Considerations.

LIBOR and the Syndicated Loans Market - Milestones and Documentation

In the UK, regulators and the Working Group on Sterling Risk-Free Reference Rates (£RFR Working Group) have long been urging loan market participants to transition away from using LIBOR on transactions. Whilst, to date, such transition has been challenging for the loan markets, recent publications such as conventions for the use of SONIA and the LMA documentation discussed below, will help generate impetus for transition. Read more about LIBOR and the Syndicated Loans Market - Milestones and Documentation. 

Transitioning from LIBOR: Implications for Islamic Finance

The discontinuation of LIBOR as an interest rate benchmark raises a number of issues for Islamic finance transactions. This briefing looks at the challenges ahead and outlines some of the potential solutions. Read more about Transitioning from LIBOR: Implications for Islamic Finance.

IBORs and the Transition to Risk Free Rates in the Singapore Debt Capital Markets

The impending end of the London Interbank Offered Rate, "LIBOR", has been a discussion point for financial markets participants ever since the Wheatley Review, and thereafter, a speech by Andrew Bailey, Chief Executive of the UK's Financial Conduct Authority (FCA) on 27 July 2017 which famously heralded its demise. Market participants need to prepare for the likelihood that LIBOR will cease to exist by the end of 2021. Even if LIBOR continues to be available into 2022, the FCA may determine that it is no longer representative of its underlying market. Since 2014, the message from international regulators has been clear: with respect to the risks presented by the end of LIBOR, there needs to be a move from LIBOR to near "risk-free rates" (RFRs) which are anchored in active and liquid underlying markets. This briefing examines the impact of the transition from LIBOR to RFRs with a specific focus on the Singapore and Singapore dollar debt capital markets, and outlines what issuers and their advisers will need to consider as we approach the deadline for the end of LIBOR. Read more about IBORs and the transition to risk free rates in the Singapore debt capital markets.

LIBOR transitioning - the impact on facility agents

With LIBOR due to be phased out by the end of 2021, loan agents ("agents") need to understand how this will affect their business and how to best prepare themselves for such an unprecedented change. This briefing focuses on the impact of LIBOR transitioning for agents – both from the perspective of their own position and as representatives for lenders. Read more about LIBOR transitioning and the impact on facility agents.

LIBOR transitioning - navigating the impact for trustees in the capital markets

Corporate trustees ("trustees") for notes that mature after the end of 2021 should brace themselves for LIBOR being phased out. While trustees have been closely monitoring benchmark replacement terms since the FCA signalled that it would no longer compel banks to submit LIBOR submissions, LIBOR transitioning will increase as 2021 draws closer and trustees will need to be prepared for the impact on their role. Read more about the impact of LIBOR transitioning for trustees

US Dollar LIBOR Transition: Challenges for Securitizations and Note Issuers

On January 21, 2020, the Alternative Reference Rates Committee (the "ARRC") published a consultation regarding spread adjustments for cash products such as floating rate notes and securitizations. This consultation solicits input from market participants regarding calculation methodologies for spread adjustments. The ARRC has committed to recommending spread adjustments as part of its efforts to provide robust contractual fallback provisions to facilitate the transition from US Dollar LIBOR-based floating rates to SOFR-based floating rates. The year 2020 is a critical year for preparing for LIBOR cessation. This briefing discusses benchmark transition challenges related to LIBOR-based floating rate notes and securitizations and related issues to be considered by floating rate note issuers, securitization sponsors and servicers. Read more on the US Dollar LIBOR transitions and the challenges for securitizations and note issuers.

LIBOR transition for the infrastructure sector

With 2020 set to be a critical year for LIBOR transition, the infrastructure market will face some significant challenges as it transitions towards the use of risk-free rates (RFRs). We look at some of those challenges and the steps market participants should be taking now to ensure a smooth transition before the end of 2021. Read more about LIBOR transition for the infrastructure sector.

Transition from LIBOR to an Alternative Benchmark Rate Raises Concerns Particular to REMICs

On October 8, 2019, the U.S. Department of Treasury proposed regulations that would address the tax issues for Real Estate Mortgage Investment Conduits that could arise from the impending transition away from interbank offered rates as reference rates for floating rate debt. As discussed in this briefing, the Proposed Regulations include some important conditions that – if adopted as proposed – will require close oversight to confirm that they are met.

Given the severity of the potential ramifications of not meeting these requirements, it is critical that all participants of a REMIC deal are aware of, and seek legal advice regarding, the tax aspects of switching to a replacement benchmark rate. Read more about the Transiton from LIBOR to an Alternative Benchmark Rate and the concerns raised in particular to REMIC's.

Sterling LIBOR transition – 2020 Roadmap

The UK regulators, in a series of co-ordinated publications, have stepped up their warnings to market participants to move away from the use of sterling LIBOR. Although there has already been much progress in the markets, this is a clear sign that momentum is expected to increase during the course of 2020 in order for market participants to be ready for the cessation of LIBOR in 2021.

In this note, we explore these publications and their implications. Read more about Sterling LIBOR transition - 2020 Roadmap

LIBOR - Loan Market Update

With just over two years to go until the FCA no longer compels banks to submit quotes for LIBOR, regulatory pressure towards transition away from LIBOR continues. Compared with other financial markets in which issuances in risk-free rates (RFRs) are moving towards becoming the norm, there have been relatively few transactions based on RFRs in the loan markets. The recent issuance of LMA exposure draft documentation may be the catalyst for movement towards resolution of the outstanding questions and further movement towards the use of RFRs. 

In this note, we consider the LMA documentation and some of the other issues relating to transition in the loan market. Read more about LIBOR - Loan Market Update.

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