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Paul Weiss Discusses Transition from LIBOR to Alternative Reference Rates by End of 2021

Notwithstanding the impact of COVID-19 on the global economy and market participants, from the perspective of regulators, working groups and industry leaders, the anticipated cessation of the London Interbank Offered Rate (“LIBOR”) remains the end of calendar year 2021.[1] Indeed, the UK Financial Conduct Authority (“FCA”) has confirmed this 2021 deadline.[2] The Bank of England (“BoE”) has explained that that the global market volatility caused by COVID-19 highlights the need to shift away from LIBOR, pointing out that LIBOR rates rose as central bank policy rates fell, reflecting low activity for the LIBOR market.[3]

While the worldwide pandemic has delayed certain interim deadlines and has increased challenges faced by market participants as they work to implement proposed alternative reference rates, international and U.S. regulators, industry leaders and working groups have maintained their focus on an efficient LIBOR transition. We provide an overview of developments and regulatory guidance issued during the first half of 2020, all of which reaffirm the critical importance of being prepared for the cessation of LIBOR as a reference rate, which affects an estimated $200 trillion of financial instruments referencing U.S. Dollar LIBOR.[4]

Developments Impacting the LIBOR Transition Timeline

Over the past few months, the efforts of the global marketplace to smoothly transition from LIBOR to alternative reference rates has faced unprecedented challenges arising from the COVID-19 pandemic and the resulting economic upheaval.

United States

The Fed Pivots Away from SOFR to LIBOR for Its Main Street Lending Program Due to Pressure From Market Participants

On April 9, 2020, the Federal Reserve Bank (the “Fed”) announced that it intended to issue loans referencing the Secured Overnight Financing Rate (“SOFR”)[5] for its Federal Main Street Lending Program (the “Main Street Program”),[6] under which the Fed would provide loans to small and medium-sized businesses to combat the financial impacts of the COVID-19 pandemic. Three weeks later, on April 30, the Fed reversed its position and announced that it would use LIBOR instead of SOFR as the benchmark rate for approximately $75 billion in loans issued under the Main Street Program.[7] The Fed’s pivot from SOFR to LIBOR apparently resulted from resistance from potential participants in the Main Street Program, who complained that implementing new systems to issue SOFR-linked loans for the Main Street Program would divert additional resources from existing challenges arising from COVID-19. In selecting LIBOR, the Fed acknowledged the impact of its decision on the LIBOR transition by stating, “LIBOR remains the most common base rate used in business lending, even though firms cannot rely on LIBOR being published after the end of 2021.”[8]

As a practical matter, the Fed’s reversal will create a large volume of new LIBOR-linked loans with less than two years until the stated LIBOR transition deadline. This likely will lead to a wave of renegotiation and valuation challenges, as well as litigation risks with the anticipated cessation of LIBOR’s publication looming. Critically, the Fed’s decision tacitly acknowledges that market participants and the U.S. economy are not ready for a switch from LIBOR to alternative reference rates, a revelation that could ultimately hamper market-wide transition to SOFR over the coming months. Nevertheless, by cautioning lenders and borrowers to include fallback contract language to SOFR for loans that extend beyond the start of 2022, the Fed also signaled, from its perspective, the 2021 deadline is unlikely to change.

The ARRC’s Proposed New York State Legislation for SOFR Implementation Remains Unaddressed

In our March 2020 client memorandum, we noted that the legislative solution announced by the ARRC might not be timely considered by the New York State legislature as a result of the COVID-19 pandemic.[9] The ARRC’s proposed legislation aims to encourage widespread adoption of SOFR for U.S. Dollar LIBOR instruments by:

Because of the COVID-19 pandemic, the New York State Legislature has yet to address the ARRC’s aforementioned proposal, and it is unclear when this measure will be addressed, and if it will be enacted.[11]


UK Regulators Extend Deadline for Ending Use of Sterling-linked LIBOR in New Loans

In the midst of the pandemic, on April 29, 2020, the FCA issued a statement in which it noted that it, the BoE and the Working Group on Sterling Risk-Free Reference Rates (the “RFRWG”) had concluded that it will not be feasible to complete the transition away from LIBOR across all new sterling LIBOR-linked loans by the original end-Q3 2020 target and that there will likely be continued use of LIBOR-referencing loan products into Q4 2020.[12] In particular, the FCA and its counterparts recognized the need to maintain the smooth flow of credit to the real economy. In light of this, the RFRWG recommends the following revised deadlines:[13]

The FCA statement concluded by noting that the chair of the RFRWG, the FCA and the BoE will continue to work with members of the RFRWG and international counterparts to assess the evolving impact of COVID-19 on firms’ LIBOR transition efforts, and provide further updates in due course.

UK Government Announces Intent to Provide FCA With Enhanced Regulatory Powers to Address LIBOR Transition

Despite the aforementioned extensions of certain interim deadlines set by UK regulators, the UK government recently announced a plan to broaden the FCA’s powers in the forthcoming Financial Services Bill to address LIBOR transition.[15] The government notes that, unlike many other jurisdictions, the UK has an existing regulatory framework for critical benchmarks. Rather than impose legal changes on LIBOR-referencing contracts governed by UK law, the government intends to amend and strengthen the existing framework by the end of 2021 such that the FCA has the appropriate regulatory powers to manage and direct the wind-down period prior to LIBOR cessation in order to protect consumers and ensure market integrity. The government therefore intends to:

For its part, the FCA welcomed the announcement, emphasizing that the proposed enhanced powers could help solve the problem of “tough” legacy contacts. “Although this would not make the benchmark representative again, it would allow the FCA to stabilize certain LIBOR rates during a wind-down period so that limited use in legacy contracts could continue, if suitable robust inputs to support such a methodology change are available,” the FCA stated.[16]

U.S. Regulators, Working Groups, and Industry Leaders Continue to Focus on Operational Strategies for a Smooth Transition Away From LIBOR

Notwithstanding the challenges facing a smooth transition away from LIBOR, domestic U.S. regulators, working groups and industry leaders have reaffirmed the 2021 cessation deadline and announced various efforts as part of an effective and efficient LIBOR transition for market participants in advance of the deadline.

Domestic U.S. Regulatory Activity

As we outlined in January,[17] the New York Department of Financial Services (“DFS”), the Consumer Financial Protection Bureau (“CFPB”), the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”), and Office of the Comptroller of the Currency (“OCC”) have followed the lead of the Fed and the Federal Reserve Bank of New York in emphasizing to their regulated entities the necessity of LIBOR transition preparation. In particular:

Working Groups and Industry Leaders

The ARRC and the International Swaps and Derivatives Association (“ISDA”), among others, have been active in preparing and releasing LIBOR transition guidance for market participants. These groups have been at the forefront of fielding and addressing constituent concerns to ensure minimal market disruption as market participants transition to SOFR.

Their efforts continue to spur change. For example, trading in SOFR-linked U.S. Dollar instruments has rapidly increased in recent months, indicating that some market sectors have embraced a post-LIBOR environment. Some of these SOFR-related increases have been the direct result of the COVID-19 induced market volatility, such as sales of U.S. agency debt linked to SOFR, which dramatically increased in March both in terms of volume and in comparison to the use of U.S Dollar LIBOR. In fact, 98% of the total bond issuances during this period was benchmarked to SOFR, a more than 100% increase over the same period from 2019.[25]



The Credit Sensitivity Working Group (“CSG”)


Given recent global crises, the transition away from LIBOR may not be top of mind for market participants, executives, and boards of directors. But legislators, regulators, industry leaders, and working groups continue to emphasize the end-of-2021 cessation deadline and the need to focus on transition planning. They also expect that market participants will be adequately prepared to transition notwithstanding that some interim deadlines have been delayed.

Indeed, the volume of LIBOR-linked instruments is so great that there may be substantial legal, business and regulatory risks for those who adopt a “wait-and-see” approach with the hope that the cessation deadline will be extended.As a result, market participants should prioritize and devote necessary resources to LIBOR transition.Senior management should consider instituting more frequent oversight of LIBOR-transition processes, including assessments of whether risk disclosures are sufficient, reviewing LIBOR transition impacts on balance sheets, receiving regular updates on the progress of LIBOR-related negotiations, and discussions with counterparties and customers.Boards of directors should also consider as part of their risk oversight functions receiving updates from management on these efforts.


[1]       See Paul, Weiss March 30, 2020 Client Memorandum, COVID-19: LIBOR 2021 Cessation Timing Unchanged Though Planning Delays Expected, available here.

[2]       FCA’s national and international response to coronavirus (COVID-19) and Brexit, Speech delivered by Nausicaa Delfas, Executive Director of International, at Deloitte Annual Conduct Risk Conference, FCA, June 5, 2020, available here.

[3]       Interim Financial Stability Report, BoE, May 2020, available here.

[4]       Transition from LIBOR, Alternative Reference Rates Committee (“ARRC”), available here.

[5]       SOFR is the Federal Reserve Bank of New York’s endorsed benchmark rate that best represents for U.S. Dollar LIBOR derivative and other financial contract instruments. The ARRC is a group of private-market participants convened by the Fed and the Federal Reserve Bank of New York to help ensure a successful transition from U.S. Dollar LIBOR.

[6]       Main Street Lending Program, FAQ, Federal Reserve Bank, available here; Vipal Monga and Cezary Podkul, Fed Won’t Use Stimulus Aid to Push Libor Replacement, WSJ, May 3, 2020, available here [Subscription Required].

[7]       Federal Reserve Board announces it is expanding the scope and eligibility for the Main Street Lending Program, Federal Reserve Bank, Apr. 30, 2020, available here.

[8]       Main Street Lending Program, FAQ, Federal Reserve Bank, available here.

[9]       See Paul, Weiss March 30, 2020 Client Memorandum, COVID-19: LIBOR 2021 Cessation Timing Unchanged Though Planning Delays Expected, available here.

[10]     Proposed Legislative Solution to Minimize Legal Uncertainty and Adverse Economic Impact Associated with LIBOR Transition, ARRC, available here.

[11]     Notwithstanding these legislative hurdles, the proposed legislation may also face certain challenges on the basis that it potentially conflicts with federal law, such as Section 316(b) of the Trust Indenture Act of 1939, and the U.S. Constitution, specifically Article I, Section 10, Clause 1 (Contracts Clause).

[12]     Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans, FCA, Apr. 29, 2020 (hereinafter, “RFRWG Statement”), available here.  In January 2020, UK regulators previously published 2020 targets intended to support the transition by market participants away from LIBOR to the Sterling Overnight Index Average (“SONIA”) rate by the end of 2021. One interim milestone called for banks to stop issuing new sterling-denominated loans using the LIBOR benchmark by the end of the third quarter of 2020. See Next steps for LIBOR transition in 2020: the time to act is now, FCA, Jan. 16, 2020, available here.

[13]     RFRWG Statement, FCA, Apr. 29, 2020, available here.

[14]     SONIA is the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market. It is used for overnight funding for trades that occur in off-hours and represents the depth of overnight business in the marketplace. SONIA is the RFRWG’s preferred benchmark for the transition to sterling risk-free rates from LIBOR.

[15]     Rishi Sunak, Chancellor of the Exchequer, Financial Services Regulation: Written statement – HCWS307, UK Parliament, June 23, 2020, available here; FCA statement on planned amendments to the Benchmarks Regulation, FCA, June 23, 2020, available here; Benchmarks Regulation—Proposed New Powers, FCA, June 23, 2020, available here.

[16]     FCA statement on planned amendments to the Benchmarks Regulation, FCA, June 23, 2020, available here.

[17]     See Paul, Weiss January 29, 2020 Client Memorandum, Global Regulators Press Market Participants to Prepare Now for LIBOR Transition, available here.

[18]     Regulation Z principally prohibits specific acts and practices in connection with an extension of credit secured by a consumer’s dwelling (i.e., certain practices relating to payments made to compensate mortgage brokers and other loan originators).

[19]     Fast Facts: Proposed LIBOR Transition Rule, CFPB, available here.

[20]     Examination Initiative: LIBOR Transition Preparedness, SEC, June 18, 2020, available here. “Registrant” includes SEC-registered investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents and clearing agencies.

[21]     2020 Risk Monitoring and Examination Priorities Letter, FINRA, Jan. 9, 2020, available here.

[22]     Libor Transition: FFIEC Statement on Managing the Libor Transition and Guidance for Banks, OCC, July 1, 2020, available here.

[23]     Final Rule Margin and Capital Requirements for Covered Swap Entities, 12 CFR Part 45, Docket No. OCC-2019-0023, RIN: 1557-AE69, OCC, June 25, 2020, available here.

[24]     Agencies Finalize Amendments to Swap Margin Rule, OCC, June 25, 2020, available here (noting that the final rule also clarifies that swap entities may conduct risk-reducing portfolio compression or make certain other non-substantive amendments to their legacy swap portfolios without altering their legacy status).

[25]     Christopher Maloney, Issuance of SOFR-Linked U.S. Agency Debt Skyrocketed in March, Bloomberg, Apr. 8, 2020,
available here [Subscription Required].

[26]     2020 Objectives, ARRC, available here.

[27]     The ARRC met its deadline of June 30 for issuing a final recommendation for hardwired fallback language involving syndicated loans.

[28]     ARRC Recommended Best Practices for Completing the Transition from LIBOR, ARRC, available here.

[29]     ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products, ARRC, Apr. 8, 2020, available here; ARRC Issues Supplemental Consultation on Spread Adjustment Methodology, ARRC, May 6, 2020, available here.

[30]     See Paul, Weiss April 9, 2020 Client Memorandum, LIBOR Cessation: ARRC Announces Recommendation for Spread Adjustment Methodology for Cash Products, available here.

[31]     The supplemental consultation was open for feedback through June 8, 2020. In addition, the ARRC’s Floating Rate Notes Working Group issued a technical statement on how market participants may reference the New York Fed’s published SOFR Index in Floating Rate Note (FRNs). See ARRC Floating Rate Notes Working Group Statement On Use Of The SOFR Index, ARRC, available here. According to the statement, the SOFR Index could be used to simplify documentation, reduce operational risk and streamline system development by allowing market participants to more easily calculate and reconcile payment amounts. Id.

[32]     Several respondents generally cited the importance of consistency with ISDA values from a hedging perspective. ARRC Announces Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products, ARRC, June 30, 2020, available here.  The ARRC received 49 responses to its supplemental consultation from a mix of banks, government-sponsored entities, asset managers, insurance companies, and industry associations. Responses were broadly similar across these industry types.

[33]     ARRC Releases Updated Recommended Fallback Language for Syndicated Loans, ARRC, June 30, 2020, available here.

[34]     Summary of Responses to the ISDA 2020 Consultation on How to Implement Pre-Cessation Fallbacks in Derivatives, ISDA, May 14, 2020, available here. We previously reported on the preliminary results of this consultation in April. See Paul, Weiss April 20, 2020 Client Memorandum, LIBOR Cessation: ISDA Announces Preliminary Results of Consultation on Pre-cessation Fallbacks for LIBOR, available here.

[35]     Meeting with Regional Bank Signatories to Discuss Credit Sensitivity Workshops, New York Federal Reserve Bank, Feb. 25, 2020, available here; Transition from LIBOR: Credit Sensitivity Group Workshops, New York Federal Reserve Bank, June 4, 2020, available here; Marcus Burnett, How regional banks could shape US Libor replacement, Risk.Net, Apr. 21, 2020, available here [Subscription Required].

[36]     Marcus Burnett, How regional banks could shape US Libor replacement, Risk.Net, Apr. 21, 2020, available here [Subscription Required].

[37]     Id.

[38]     Id.

[39]     Id.

This post comes to us from Paul, Weiss, Rifkind, Wharton & Garrison LLP. It is based on the firm’s memorandum, “LIBOR Transition Update: Efforts Continue to Transition from LIBOR to Alternative Reference Rates by the End of 2021,” date July 7, 2020, and available here.

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