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On 29 April, the Risk-free Rates working group announced that in the light of the COVID-19 crisis the deadline for no new Sterling London Interbank Offered Rate (LIBOR) loans has been pushed back from end Q3 2020 to end Q1 2021.
This is in recognition of the challenges being faced by firms in the current crisis, however the pressure is still on with various interim targets set, and no change to the final target date of the end of 2021:
- By end Q3 2020: lenders should be able to offer non-LIBOR linked products
- After end Q3 2020: any new £ LIBOR loans include switch mechanism to Sterling Overnight Index Average (SONIA) or alternatives by end 2021
- After end Q1 2021:no new £ LIBOR loans issued (originally Q3 2020)
However the previous end Q1 2021 target to demonstrate a significant reduction in LIBOR exposure is not mentioned, and so we can assume it remains as is.
In the announcement they go on to highlight other transition efforts – such as those for tough legacy and credit spread adjustments – that will continue with the support of the various working groups.
Not a surprise, and maybe was in the post anyway?
The statement is an acknowledgement of the reality of conditions today, but nonetheless good to be transparent on a near-term date that was clearly worrying many close to transition efforts. The industry will welcome the extra time to get organised.
In early March just prior to the escalation of the crisis in Europe the Loan Enablement Taskforce issued a timeline to deliver against the Q3 deadline. Even then there were challenges around hitting the mark given a lack of consensus on conventions (see Carrot & Stick), the evolving picture on use of indices, and concerns on the ability of loan infrastructure providers to deliver system changes for compounding in time.
No time to take foot off the pedal though...
That said, lenders especially need to remain focused. Banks will still be expected to offer SONIA-based products by Q3 this year, and get to grips with baking-in switch arrangements to risk-free rates (RFRs) into any new LIBOR loans written from then on. There have been a few examples of this already in the market, so we expect an emerging consensus on how best to achieve this (for example in the approach to spread adjustment and rate floors).
The move does raise a question though – originally with a target to cease writing new LIBOR loans by end Q3 2020, one might reasonably have hoped that discussions would shift to dealing with the loan back book during Q4 2020. Now that date has moved out, might discussions on dealing with legacy loans also be delayed by a similar amount?
With no mention of the Q1 2021 reduction in LIBOR exposure deadline in the announcement, presumably the authorities are hoping not, but it is clearly a risk. The new facilities with RFR switch arrangements might not count towards additional LIBOR exposure, but that still leaves a lot of legacy.
And in other news - ISDA & Bloomberg publish methodology for spread adjustment
While there might be some respite for loans, the derivatives market continues to lead the way. Following the announcement on preliminary results of the pre-cessation trigger consultation on 15 April, the International Swaps & Derivatives Association (ISDA) and Bloomberg have now announced the final methodology for calculation of the spread adjustment.
ISDA are expected to publish the long awaited fallback protocol in July, and Bloomberg will start to publish daily 5 year median lookback numbers across the main tenors around the same time.
So some respite but the pace of transition will not have eased up much for many.