The worry is that many will leave this until the latter part of the year, then there will be contention for limited legal and operational resources to make the necessary amendments. And if board meetings or other governance is required that will take time to schedule.

In Act now or fall back? we outlined the main paths for transition. Derivatives are fortunate in that the majority of the market has adopted the ISDA[2] Fallback Protocol, meaning if counterparties do nothing else, their trades will successfully fall back to SONIA[3] + CAS[4] come cessation. Legacy bonds are going through their own solicitation process to amend rates, and in some cases might lean on ‘tough legacy’ in the end.

But loans do not benefit from a simple fallback mechanism that everyone can adopt. They need more time-consuming work on a case-by-case basis. And when it is a syndicated loan that multiplies up the complexity.

One stumbling block for those negotiating transition of loans that have linked swaps is ensuring they maintain the alignment between loan and swap that they have today. If the loan ends up on a 5d lag for SONIA (which is market convention) but the swap adopts the protocol convention of the 2d shift, then there will be an (albeit not that economically significant) mismatch.

And the solution

Fortunately, NatWest has an answer for that particular niggle. When discussing transition of swaps hedging loans that will transition on a deferred switch basis post cessation, we can now provide an amendment agreement as an alternative to the ISDA Protocol, which at cessation of LIBOR will instead fallback to SONIA + CAS using the same 5d lag convention as the loan. For those preferring to use fallbacks, we hope this will be a welcome development to increase the efficiency and pace of the removal of LIBOR cessation risk. As with all options, there are pros and cons with different alternatives, please get in touch with us via our mailbox rfr@natwestmarkets.com if you would like to learn more, and we can put you in touch with our risk solutions teams.

I would walk 500 milestones*...

The milestones are coming thick and fast. We’ve already had a bunch this year, and a generous further helping is on the way. 

Quick roundup for those who have been napping (most of these can be found on the £RFR WG Roadmap):

• 31 Mar 21 - no new GBP LIBOR loans or linear derivatives (except for risk management) 
• 11 May 21 - ’SONIA first’ for non-linear derivatives
• 17 Jun 21 - ’SONIA first’ for futures
• 30 Jun 21 - no new GBP LIBOR non-linear or exchange trade derivatives (same exception)
• 30 Jun 21 – ARRC5 original (Mar 2020) ‘best practices guide‘ milestone to cease trading new USD LIBOR trades except for risk management of legacy positions 
• 26 Jul 21 - ’SOFR6 first’ - interdealer brokers change USD linear swap trading conventions from USD LIBOR to SOFR (see ARRC announcement supporting MRAC7)
• 30 Sep 21 - complete active conversion of GBP LIBOR transactions where viable (and if not viable ensure robust fallbacks in place) 
• 15 Oct 21 - LCH8 convert cleared EONIA9 swaps to €STR10 
• 03 Dec 21 - LCH convert cleared CHF, EUR and JPY LIBOR to respective RFRs11 + CAS
• 17 Dec 21 - LCH convert cleared GBP LIBOR swaps to SONIA + CAS, and ICE12 do the same for Futures contracts
• 31 Dec 21 - cease publication of GBP, CHF, JPY and EUR LIBOR
• 31 Dec 21 - no new USD LIBOR financial contracts (with hedging exemption) per NY Fed Statement  
• 03 Jan 22 - cease publication of EONIA
• 30 Jun 23 - cease publication of USD LIBOR (except some minor tenors that go end 2021)

That Q3 2021 milestone to complete active transition is causing some consternation in the market, but it’s clear that the Working Group has set that target in order to focus attention, and discourage market as a whole from leaving everything until the last minute. And where board level meetings are required, that those are planned ahead of the summer break to avoid transition delays later.

...and we will walk 500 more

The end is in sight, but still a few more miles to go.

* and for those needing a Proclaimers top up....I’m Gonna Be

Notes

[1] LIBOR London Inter-Bank Offered Rate

[2] ISDA International Swaps and Derivatives Association, Inc.

[3] SONIA Sterling Over Night Indexed Average

[4] CAS Credit adjustment spread

[5] ARRC Alternative Reference Rates Committee

[6] SOFR Secured Overnight Financing Rate

[7] MRAC Market Risk Advisory Committee

[8] LCH LCH (originally London Clearing House)

[9] EONIA Euro Overnight Index Average

[10] €STR Euro Short-Term Rate

[11] RFRs Risk-Free Rates

[12] ICE Intercontinental Exchange, INC