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Research and Market Commentary

Update on Benchmark Rate Reform - October 2020

October 15, 2020

Scotiabank has partnered with IHS Markit, who are the owners of the Outreach 360 platform to provide a further update on the transition away from key benchmark interest rates, such as the London Interbank Offered Rate (LIBOR), and the progress on the adoption of alternative risk-free rates (RFRs). Further details regarding next steps will be communicated to our clients in the upcoming months.

 

As noted in prior updates, regulators acknowledge the difficulties many firms and their employees are facing as a result of COVID-19. At the same time, however, the Financial Conduct Authority (FCA) and regulators in several jurisdictions maintain the view that market participants should continue to assume that LIBOR will no longer be available after the end of 2021.

 

To assist you in your continued transition efforts, we are happy to highlight the latest regulatory developments:

 

  1. ISDA published a statement from its Board of Directors on October 9, 2020 confirming the launch of the IBOR Fallbacks Supplement and Protocol on October 23, 2020. The Supplement and amendments made by the Protocol will take effect on January 25, 2021. The release of the IBOR Fallbacks Supplement and Protocol was dependent on the approval from competition authorities, including the US Department of Justice (DoJ) and on October 1, 2020, ISDA received a business review letter from the DoJ concluding that ISDA’s proposal is unlikely to produce anticompetitive effects and the DoJ has no intention to challenge ISDA’s proposal to amend its standard documentation. ISDA has also kept competition authorities in other jurisdictions fully informed of the issues covered in the DoJ letter but it does not anticipate any adverse action by these authorities.

  2. The Bank of England issued a news release on September 10, 2020 reiterating the need for a timely transition away from the use of LIBOR before the end of 2021. In addition, the Bank of England published materials to support a range of firms in preparing for this transition. These materials may be found here.

  3. The Chicago Mercantile Exchange (CME) and the London Clearing House (LCH) completed the switch in discounting and price alignment (PAI) for Euro-denominated interest rates products from EONIA to €STR on July 27, 2020. The two CCPs are scheduled to make the change for USD-denominated interest rate products from Effective Fed Funds Rate (EFFR) to the Secured Overnight Financing Rate (SOFR) on October 19, 2020. 

  4. Throughout July and August, 2020, the ARRC held a Summer SOFR Series, which included number of webinars designed to educate the public on a variety of topics, such as SOFR Explained, Preparing to move from LIBOR Derivatives, Accounting/Tax/Regulation and Approaching the Transition. Recordings of each webinars and presentation slides are available on the ARRC website. The ARRC also released a SOFR Starter Kit, including a number of useful fact sheets aimed at providing key information to the market on this key alternative reference rate.

  5. The ARRC published revised recommendations for hardwired fallback language to be used in USD LIBOR Syndicated Loans  and for USD LIBOR Bilateral Loans at the end of June and August 2020, respectively.

  6. At the end of May, 2020, the ARRC published Recommended Best Practices for Completing the Transition from LIBOR for market participants in which the ARRC proposes a series of guidelines regarding important planning milestones, according to product type.  In specific connection to the ISDA Protocol, the ARRC recommends that market participants adhere during the adherence window, and more specifically that, derivatives dealers with significant exposures adhere as promptly as possible to encourage broader market adoption.

 

We continue to recommend that you stay informed on the latest industry developments and to seek professional advice, if necessary, to understand the impact this transition may have on your business.

 

For further information, please refer to our Scotiabank’s website for various online resources, including our Discontinuation of LIBOR: What’s next?, and Benchmark Rate Reform Frequently Asked Questions. Our Benchmark Rates Regulatory Disclosure applies to this communication and all other communications you receive or have received from us on this topic.

 

If you do have any questions about Benchmark Rate Reform, or any of this material, do not hesitate to contact your Scotiabank representative, or email us at ibor.transition@scotiabank.com.

 

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