As market participants prepare to submit comments on the recent proposal of the UK’s Financial Conduct Authority (the “FCA”) (available here) to require the temporary publication of a “synthetic” 1-, 3- and 6-month USD LIBOR, some have voiced concern that such a compelled publication of a synthetic USD LIBOR could precipitate a wave of litigation over whether certain U.S. law-governed contracts will be able to fall back to contractually agreed alternative rates in June 2023.
Michael O'Brien is a partner in the Finance and Bankruptcy Practice Group and is based in the firm’s Chicago office. He is also the leader of the Derivatives & Structured Products Team.
Security-Based Swap Rules for End-Users
As of November 1, 2021, dealers in security-based swaps (“SBS”) whose dealing activity exceeds certain de minimis thresholds (e.g., gross notional amount of $3 billion for credit default SBS, $150 million for other SBS, and $25 million for SBS where the counterparty is a special entity) are required to register with the SEC as a security-based swap dealer (“SBSD”) and to comply with the SEC’s regulations applicable to SBS. Many dealers exceeded these thresholds and filed for registration on or prior to November 1. Other dealers who exceed these thresholds later will be required to register at a future date.
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LSTA Publishes Term SOFR Concept Document
On August 25, the LSTA published its Term SOFR Concept Document (the “Term SOFR Concept Document”)—the latest addition to its suite of SOFR-based Concept Documents.
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ARRC Formally Recommends Term SOFR
As expected, on July 28, 2021, the Alternative Reference Rates Committee (ARRC) formally recommended the CME’s SOFR Term Rate. The SOFR Term Rate is known in advance of the related interest period and provides an indicative, forward-looking measurement of SOFR based on market expectations implied from leading derivatives markets. In this respect, the SOFR Term Rate functions in a manner similar to today’s LIBOR rates. In contrast, the Daily Simple SOFR or Daily Compounded SOFR used for interest periods beyond overnight can only be determined in arrears. The SOFR Term Rate thus facilitates in a significant way the transition away from the current LIBOR markets.
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Latest Milestone in LIBOR Replacement Passed
This past Monday, July 26, marked passage of the most recent major milestone in the replacement of LIBOR as the benchmark USD interest rate. Following the recommendation of the CFTC’s Market Risk Advisory Committee (MRAC) Interest Rate Benchmark Reform Subcommittee, on July 26, 2021 interdealer brokers replaced trading in LIBOR linear swaps with SOFR linear swaps. This switch is a precursor to the recommendation of SOFR term rates. The switch does not apply to trades between dealers and their non-dealer customers.
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