So - Easter weekend calculations are coming back to bite us! I recall in the early days of LIBOR Transition we used Easter weekend as a more complicated example when comparing the different calculation methodologies. Who would have thought that Good Friday 2023 (a Bank Holiday in the UK but not in the US) would cause some calculation issues?
As notified by the New York Fed on March 8, 2023 in their Statement Regarding the Publication of Reference Rates on Friday, April 7, 2023 - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org), due to the release of the March Employment Situation report, SIFMA did not recommend a full closure for secondary market trading of U.S. government securities for Good Friday. However, repo market participants did observe the holiday which meant that there was no settlement of cleared Treasury repos. This had the effect of eliminating two of the three market segments used to calculate and differentiate the Treasury repo reference rates and hence no SOFR could be published for that Friday.
It should be noted that this has no impact on Term SOFR and other SOFR averages.
The LSTA put out a note (Good Friday…no SOFR? - LSTA) on March 30, 2023 explaining the situation for the US loan markets. In essence, the standard LSTA position where SOFR has not been published on a SOFR Determination Day, is to fallback to using the SOFR as published the preceding U.S. Government Securities Business Day.
ISDA released a guidance note on April 4, 2023 (ISDA Guidance: SOFR Publication on Good Friday 2023 – International Swaps and Derivatives Association) which essentially confirms that a temporary non-publication of SOFR is triggered in respect of the value of SOFR for Friday 7th April and, unless otherwise specified in the Confirmation, SOFR for Friday 7th April should be determined by reference to SOFR as published in respect of Thursday 6th April (which is the rate that was published on Monday 10th April).
The LMA is yet to comment publicly on the topic, but this issue has affected compounded SOFR calculations which, if using the standard LMA provisions, provide in the definition of “Daily Rate for any RFR Banking Day” that where SOFR is not available on any given day, the fallback is to the Central Bank Rate [with any applicable Central Bank Rate Adjustment].
It is interesting to see the different approach between the LSTA and LMA drafting - we now see this having a practical impact (although it may be of insignificant monetary value). Will a bank's automated pricing tools be able to calculate the Central Bank Rate and the related adjustment, or will it need manual intervention? Will the LMA update drafting to reflect the experience banks have from this incident and bring the result in line with the LSTA outcome? Time will tell.
One thing is for certain - we have less than 3 months until the representative USD LIBOR rates are switched off (with synthetic LIBOR still available for a further 18 months) - so we have no time to lose and need to keep amending the legacy loan transactions that are out there.