What’s left for £LIBOR? The loan tail.

02 July 2021

Phil LloydManaging Director, Head of Customer Sales Delivery

View bio

John Stevenson-HamiltonLIBOR Client Strategy & Engagement

View bio

Other insights

View more insights

The path for much of Sterling LIBOR1 transition seems clear. But one area that continues to give cause for concern is the legacy loan portfolio, particularly amongst corporates. 

5 mins

Not because it is not clear what needs to happen, but rather that there is still a lot of ground to cover, and understandably counterparties have other priorities than renegotiating old loan agreements. The worry is that many will leave this until the latter part of the year, then there will be contention for limited legal and operational resources to make the necessary amendments. And if board meetings or other governance is required that will take time to schedule.

In Act now or fall back? we outlined the main paths for transition. Derivatives are fortunate in that the majority of the market has adopted the ISDA2 Fallback Protocol, meaning if counterparties do nothing else, their trades will successfully fall back to SONIA3 + CAS4 come cessation. Legacy bonds are going through their own solicitation process to amend rates, and in some cases might lean on ‘tough legacy’ in the end.

But loans do not benefit from a simple fallback mechanism that everyone can adopt. They need more time-consuming work on a case-by-case basis. And when it is a syndicated loan that multiplies up the complexity.

Swaps hedging loans – the problem

One stumbling block for those negotiating transition of loans that have linked swaps is ensuring they maintain the alignment between loan and swap that they have today. If the loan ends up on a 5d lag for SONIA (which is market convention) but the swap adopts the protocol convention of the 2d shift, then there will be an (albeit not that economically significant) mismatch.

- and the solution

Fortunately, NatWest has an answer for that particular niggle. When discussing transition of swaps hedging loans that will transition on a deferred switch basis post cessation, we can now provide an amendment agreement as an alternative to the ISDA Protocol, which at cessation of LIBOR will instead fallback to SONIA + CAS using the same 5d lag convention as the loan. For those preferring to use fallbacks, we hope this will be a welcome development to increase the efficiency and pace of the removal of LIBOR cessation risk. As with all options, there are pros and cons with different alternatives, please get in touch with us via our mailbox rfr@natwestmarkets.com if you would like to learn more, and we can put you in touch with our risk solutions teams.

I would walk 500 milestones... *

The milestones are coming thick and fast. We’ve already had a bunch this year, and a generous further helping is on the way. 

Quick roundup for those who have been napping (most of these can be found on the £RFR WG Roadmap):

  • 31 Mar 21 - no new GBP LIBOR loans or linear derivatives (except for risk management) 
  • 11 May 21 - ’SONIA first’ for non-linear derivatives
  • 17 Jun 21 - ’SONIA first’ for futures
  • 30 Jun 21 - no new GBP LIBOR non-linear or exchange trade derivatives (same exception)
  • 30 Jun 21 – ARRC5 original (Mar 2020) ‘best practices guide‘ milestone to cease trading new USD LIBOR trades except for risk management of legacy positions 
  • 26 Jul 21 - ’SOFR6 first’ - interdealer brokers change USD linear swap trading conventions from USD LIBOR to SOFR (see ARRC announcement supporting MRAC7)
  • 30 Sep 21 - complete active conversion of GBP LIBOR transactions where viable (and if not viable ensure robust fallbacks in place) 
  • 15 Oct 21 - LCH8 convert cleared EONIA9 swaps to €STR10 
  • 03 Dec 21 - LCH convert cleared CHF, EUR and JPY LIBOR to respective RFRs11 + CAS
  • 17 Dec 21 - LCH convert cleared GBP LIBOR swaps to SONIA + CAS, and ICE12 do the same for Futures contracts
  • 31 Dec 21 - cease publication of GBP, CHF, JPY and EUR LIBOR
  • 31 Dec 21 - no new USD LIBOR financial contracts (with hedging exemption) per NY Fed Statement  
  • 03 Jan 22 - cease publication of EONIA
  • 30 Jun 23 - cease publication of USD LIBOR (except some minor tenors that go end 2021)

That Q3 2021 milestone to complete active transition is causing some consternation in the market, but it’s clear that the Working Group has set that target in order to focus attention, and discourage market as a whole from leaving everything until the last minute. And where board level meetings are required, that those are planned ahead of the summer break to avoid transition delays later.

...and we will walk 500 more

If uncertain about the transition options or need some help, please get in touch. And have a look at our recent articles to get a bit more colour:

Act now or fall back? The LIBOR transition dilemma

SOFR, so good? BoE Governor takes aim at credit sensitive rates for USD LIBOR

The end is in sight, but still a few more miles to go.

* and for those needing a Proclaimers top up....I’m Gonna Be

Phil Lloyd, NWM Sales

John Stevenson-Hamilton, NWM LIBOR Client Engagement

1 LIBOR London Inter-Bank Offered Rate 
2 ISDA International Swaps and Derivatives Association, Inc.
3 SONIA Sterling Over Night Indexed Average
4 CAS

Credit adjustment spread

5 ARRC Alternative Reference Rates Committee
6 SOFR Secured Overnight Financing Rate
7 MRAC Market Risk Advisory Committee
8 LCH

LCH (originally London Clearing House)

9 EONIA Euro Overnight Index Average
10 €STR 

Euro Short-Term Rate

11 RFRs Risk-Free Rates
12 ICE Intercontinental Exchange, INC
LIBOR


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc. Copyright 2021 © NatWest Markets Plc. All rights reserved.