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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: June 8th, 2021

Industry developments

  • The Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) Interest Rate Benchmark Reform Subcommittee has recommended that on July 26, 2021 and thereafter, that interdealer trading conventions switch from LIBOR to the Secured Overnight Financing Rate (SOFR) for USD linear interest rate swaps. This is referred to as “SOFR First”. The SOFR First initiative also recommends keeping interdealer brokers’ screens for LIBOR linear swaps available until October 22, 2021, but for information purposes only. After this date, these screens should be turned off. The Alternative Reference Rate Committee (ARRC) welcomed the MRAC Subcommittee’s recommendation.

  • The Financial Stability Board (FSB) published a set of documents to support a smooth transition away from LIBOR by the end of 2021 for financial and non-financial sector firms, as well as authorities, to consider.

  • The Alternative Reference Rates Committee (ARRC) announced the CME Group as the administrator of SOFR for use in contract fallback language. The ARRC will consider endorsing the use of the SOFR term rates once the market indicators it has identified are met. The ARRC plans to release recommended best practices for the scope of use for Term SOFR.

  • The Financial Services Bill has been given royal assent and is now in law. The Bill provides the Financial Conduct Authority the powers it needs to oversee an orderly wind down of LIBOR. These new powers enable the FCA to direct the administrator of LIBOR to change the methodology used to compile the benchmark for certain tough legacy contracts.

  • HM Treasury (HMT) released the outcome of its consultation which sought feedback on whether legal safe harbour could be a helpful supplement to the provisions inserted into the Benchmark Regulations (BMR) by the Financial Services Bills. After considering the responses from all 32 respondents, the UK government intends to bring forward legislation to address issues identified in the consultation and to reduce the potential risk of contract uncertainty and disputes related to certain tough legacy contracts.

  • The Working Group on Sterling Risk Free Reference Rates (RFRWG) published the Operational Considerations for Fallbacks in Uncleared Linear Derivatives. The paper provides infrastructure and operational considerations for derivative market participants to consider in order to inform planning and preparation for the operationalization of fallbacks in non-cleared linear GBP LIBOR derivatives. Additionally, the RFRFWG recommends the active transition of contracts ahead of GBP LIBOR cessation as the primary method to ensure contractual certainty and retain economic control. The published RFFRWG priorities and roadmap calls to complete active conversion of all legacy GBP LIBOR contracts expiring after end-2021 and, if not viable, ensure robust fallbacks are adopted where possible by the end of Q3 2021

  • CME has begun publishing forward-looking term SOFR rates for 1-month, 3-month, and 6-month tenors. CME Group limits the licensing of its SOFR Term Rates to cash market transactions initially until June 30, 2023.

  • QUICK Corp and its group company, QUICK Benchmarks Inc. announced that it has started to calculate and publish production rates of Tokyo Term Risk Free Rate (TORF) for use as of Monday, April 26, 2021. TORF is based on uncollateralized overnight call rate which calculates the interest rate from derivative transaction data for a period of one or three months. More information can be found here.

  • The Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) published a report announcing new industry timelines to cease the issuance of SOR derivatives and financial products linked to SIBOR by the end of September 2021. Exceptions are outlined for specified purposes relating to the risk management and transition of legacy SOR positions to SORA, and new SIBOR-linked financial products by the end of September 2021.

  • The Hong Kong Monetary Authority (HKMA) and the Treasury Markets Association (TMA) updated its timeline to cease the issuance of new LIBOR-linked products by the end of 2021. This aligns with guidance published by the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.

  • The NYS Governor signed the New York State LIBOR legislation. The 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 the last LIBOR fixing / dealer poll. Additionally, the legislation provides a liability and litigation safe harbor to parties that have contractual discretion to choose a replacement for 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

Resource | MARKETS
IBOR Reform Frequently Asked Questions
Key questions to help you prepare for the transition
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).
    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.
 
    Podcasts | MARKETS
Building a Benchmark: Hear From the Experts
27:41 Guest speaker Nadine Bates, mortgage-finance firm Fannie Mae’s Treasurer, and Sandie O’Connor, who has worked at J.P. Morgan for over 30 years and chaired the Alternative Reference Rates Committee (ARRC), discuss transitioning to SOFR in the U.S. benchmark reform.

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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