On 16 December 2022, the Financial Stability Board (the FSB) issued a progress report on LIBOR and other benchmarks transition issues. They see "strong progress in transition away from USD LIBOR to SOFR in 2022" whilst also recognising that "there is still important work to be done".
They stress that "Market participants need to be taking active steps to address existing legacy contracts". With an estimated US$2 trillion of LIBOR based business loans still outstanding, there is still much work to be done and market participants are encouraged to avoid a "pile up" situation at the end of June 2023.
In June 2022, the FSB issued an assessment questionnaire to financial institutions and published the results in this report. An interesting challenge in the syndicated loan market was mentioned in one jurisdiction being the requirement to get multiple financial institutions to agree on a position. Another jurisdiction noted "that banks should establish adequate communication protocols on LIBOR transition with different stakeholders" - clearly the full message is not reaching all parts of the globe. Finally, another jurisdiction noted "that banks need to promote their transition efforts in a globally consistent manner, taking into account different situations of transition in each region" - the difficulty of adopting a one size fits all approach to a global banking business.
On non-LIBOR benchmarks, the FSB provided an update on the following jurisdictions:
- securities issued after 31 December 2022 need to include robust fallbacks when using BBSW in order to be eligible as collateral for the RBA liquidity facilities.
- CDOR will cease to be published from 28 June 2024. Derivatives and securities market have to cease using CDOR from end of June 2023 and loan market has until end of June 2024. A term CORRA rate is in development to assist the loan market with the transition.
- Work on EURIBOR fallback rates has continued in 2022. EMMI and IBA now publish forward-looking €STR term rates to be used, together with compounded €STR rates, as EURIBOR fallback rates.
- use of the new Overnight TIIE rate (which is the Mexican RFR, first published in January 2020) is starting to build pace. The use of the previous term TIIEs is likely to be banned in new products by December 2023 for the three and six months tenors, and by December 2024 for 28 day tenor. The authorities are looking to change the calculation methodology of the Mexican IBORs, so that they are now based on the new RFR, and only permit the use of them for legacy contracts while for new business, the new RFR will be the rate that must be used.
- the SGD Swap Offer Rate (SOR) will be discontinued from end of June 2023. Exposures to legacy SOR transactions have also declined. As at June 2022, syndicated loan exposures have declined by 50% from S$62 billion to S$31 billion, and bilateral corporate loan exposures (in SME loans) have declined by 55% from S$57 billion to S$26 billion. Retails loan exposures are small and have more than halved to about 4,000 transactions as at June 2022.
Click here for the full report.
So, as I have been saying for a while now #LetsGetAmending!