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Leaving LIBOR:
A Landmark Transition

The move away from the London Interbank Offered Rate (LIBOR) is a global phenomenon that has the financial industry mobilizing ahead of a looming deadline.

Updated: October 1, 2021

Industry developments

  • On September 29, FCA released a statement regarding the use of Synthetic LIBOR. FCA will require the benchmark administrator to publish 1, 3, and 6 month GPB and Japanese yen LIBOR settings under a ‘synthetic’ methodology in 2022 to be used in some legacy contracts. It is important to note that Synthetic LIBOR will not be used in new business. Along with the statement, FCA also published a Consultation Paper regarding FCA’s proposed decision on which legacy contracts can use synthetic LIBOR rates. FCA proposes:

    • “to permit legacy use of these 6 LIBOR settings in all contracts except cleared derivatives (whether directly or indirectly cleared)” under Article 23C of UK BMR.
    • “to prohibit new use of the 5 remaining US dollar LIBOR settings from end-2021” except for permitted use cases (e.g. risk management of existing positions) under Article 21A of UK BMR.
    • Proposals apply to entities and contracts in scope of UK BMR only.

    Responses for the consultation are due to the FCA by October 20, 2021. The FCA will specify before year-end which legacy contracts are permitted to use synthetic LIBOR rates.

  • On September 29, Bank of Japan (BoJ) released a Public Consultation on the Treatment of Tough Legacy Contracts in Japan. BoJ proposed the use of synthetic LIBOR in tough legacy contracts (loans and bonds only) where:

    • Parties are unable to agree insertion of fallbacks or active conversion by end 2021 and;
    • Lender / Issuer has endeavored to amend the contract via good faith discussions or consent mechanisms
    • Proposals apply to existing contracts for loans and bonds that reference JPY LIBOR under the governing Japanese law.

    Responses for the consultation are due to the BoJ by October 19, 2021.

  • On September 10, Ford became the first U.S. company to issue a SOFR loan in the replacement for the LIBOR benchmark reference rate, which is being phased out at the end of this year. The syndicated loan was led by J.P. Morgan.

  • CME announced on September 8 that CME Term SOFR rates are now available for licensing for use in OTC derivatives (e.g., structured products, swaps, security-based swaps, forwards, portfolios, warrants, options and repos and other similar derivatives instruments) for end user hedging against exposure for cash market products that references the same CME Term SOFR rate, this is in line with the ARRC best Practice Recommendations Related to Scope of Use of the Term Rate.

  • On September 8, The International Organization of Securities Commissions (IOSCO) published a Statement on Credit Sensitive Rates, reiterating the importance of focusing on the robust alternative financial benchmarks such as Risk free Rates during LIBOR transition rather than the credit sensitive rates. IOSCO also highlighted that the alternative benchmarks needs to be compliant with the IOSCO Principles on Financial Benchmarks.

  • On August 27, ARRC updated their Frequently Asked Questions clarifying the definition of end-user and what is expected for use of the SOFR Term Rate in end-user facing derivatives. The ARRC considers an “end user to be a direct party or guarantor to a new SOFR Term Rate business loan or securitization linked to SOFR Term Rate assets, or to a legacy LIBOR product that has converted to the SOFR Term Rate through contractual fallback language or legislation.”

  • On August 11, Refinitiv launched USD IBOR Cash Fallbacks prototype rate, following ARRC’s announcement that it selected Refinitiv as Publisher of its Spread Adjustment Rates for Cash Products. The rate is intended to support market participants (lenders and borrowers) with their transition away from LIBOR.

  • Interdealer trading conventions changed from LIBOR to SOFR for USD linear interest rate swaps on July 26. This completed Phase 1 of the SOFR First initiative. The completion of the conventions shift along with continued growth in the SOFR cash and derivatives market led the Alternative Reference Rates Committee (ARRC) to formally recommend the CME’s forward-looking SOFR term rates. The ARRC’s formal endorsement of the CME Term SOFR Rates followed their announcement of its recommended Loan Conventions and Best Practices for Use of Forward-Looking SOFR Term Rate. Phase 2 of the SOFR First initiative was completed on September 21 which changed the interdealer trading conventions in Cross currency swaps with legs involving CHF, GBP, JPY and USD LIBOR (other currencies to be transitioned at a later date). Phase 3 will be for the interdealer market for Swaptions, caps, floors, other non-linear products. Date to be confirmed by Subcommittee.

  • The U.S. House Financial Services Committee voted to advance “The Adjustable Interest Rate (LIBOR) Act of 2021”, a bill that would establish a process at the federal level to add the Secured Overnight Financing Rate (SOFR), or an appropriately adjusted form of SOFR, to certain legacy contracts that do not have sufficient fallback language. This legislation is intended to promote a smooth transition away from Libor by promoting legal certainty, consistency and limiting legal disputes. This followed the NYS Governor’s signing of the New York State LIBOR legislation. The NYS legislation, by operation of law, would insert ARRC-recommended fallback language in Libor-referencing contracts that are governed by NY law and either a) have no fallback provisions addressing a cessation of Libor or b) fall back to a LIBOR-based rate / dealer poll. Additionally, the legislation provides a liability and litigation safe harbor to parties that have contractual discretion to choose a replacement for Libor that is based on Libor or similar to Libor if they select the fallback recommended by the ARRC for that particular type of product. The legislation has no effect on contracts, securities or instruments that fall back to a rate that is not Libor (e.g., Prime, FFE) or on contracts where the parties to the contract have agreed that the legislation will not apply.

Useful Resources

Industry Groups

    Podcasts | MARKETS
Leaving LIBOR Part III: SOFR First
17:05 In this podcast episode, we discuss the latest developments in the transition away from the London Interbank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR) and SOFR First, the upcoming July 26th date in which interdealer trading conventions switch from LIBOR to SOFR for USD linear interest rate swaps. Thomas Pluta, J.P. Morgan’s global head of linear rates trading, and Chris Palmer, head of J.P. Morgan’s LIBOR transition program, join J.P. Morgan’s Luis Asturizaga to discuss what to expect as we approach SOFR First and what’s next for SOFR Term Rates and the Credit Sensitive Rate.
Resource | MARKETS
IBOR Reform Frequently Asked Questions
Key questions to help you prepare for the transition.
Resource | MARKETS
IBOR Reform Key Dates
Key dates to be aware of as you prepare for the transition.
    Podcasts | MARKETS
U.S. Dollar LIBOR Transition Update
31:23 J.P. Morgan’s Chris Palmer, head of firm-wide LIBOR Transition Program, Josh Younger, head of U.S. Interest Rate Derivatives Strategy, and Ben Kinney, co-Head of Global Rates Sales discuss recent regulatory announcements and the practical implications of a USD LIBOR extension. Recorded December 4, 2020.
    Podcasts | MARKETS
Benchmark Reform Around the World
31:03 In our second podcast episode, J.P. Morgan's Charles Bristow, global head of Rates, Chris Palmer, who leads the firm-wide LIBOR transition program and Cyprien Decoux, head of Rates Structuring EMEA, discuss international benchmark reform.
Article | MARKETS
LIBOR and the New Normal
J.P. Morgan outlines the path for adopting Risk-Free Rates (RFRs), as global markets transition away from the London Interbank Offer Rate (LIBOR).

Changes to Interbank Offered Rates (IBORs) and other benchmark rates: Certain interest rate benchmarks are, or may in the future become, subject to ongoing international, national and other regulatory guidance, reform and proposals for reform. For more information, please consult: https://www.jpmorgan.com/global/disclosures/interbank_offered_rates

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