On 31 May 2023, the UK Financial Conduct Authority (the FCA) and the US Alternative Reference Rates Committee (the ARRC) published final announcements, reminding market participants of the impending US dollar LIBOR cessation at the end of June and the need to transition away from LIBOR as soon as possible. The FCA also published a Feedback Statement related to its November 2022 consultation on USD LIBOR.

The ARRC, the FCA and other authorities worldwide have long emphasised the need for an orderly transition away from LIBOR. The FCA reiterates that synthetic LIBOR remains only a temporary solution to allow more time to complete transition efforts. By now, firms should be fully aware of, and prepared for, the approaching end-June deadline. Those that are not prepared risk uncertain and potentially unfavourable outcomes with respect to their legacy contracts along with operational risks. Therefore, firms must continue to actively transition LIBOR-referencing contracts to appropriate and robust reference rates, with the FCA expecting firms to deliver demonstrable progress.

On 25 May 2023, the LMA published its exposure draft term SOFR documentation as recommended form. The related term SOFR commentary has also been updated. 

The move to recommended form follows the increasing use in the market of the term SOFR provisions in the exposure drafts, market feedback received, the length of time since publication of the exposure drafts and the impending end-June 2023 deadline for US dollar LIBOR transition. Note that, as with all LMA recommended forms, these are non-binding and parties are free to depart from their terms.

In respect of fallbacks to term SOFR, the options presented remain suggestions only given some ongoing discussions in the market. However, market participants are reminded of recent regulatory statements, including from the Financial Stability Board, that contracts referencing term RFRs need to have robust fallbacks in place. Market participants are also reminded that cost of funds is only included in the recommended form term SOFR documentation as a potential option for an ultimate fallback. Cost of funds is not designed to be used as a primary fallback given that it is not a robust, scalable or workable long-term fallback.    

We are pleased to have published three new modules within our 'Transition to RFRs' e-learning course. 

The new modules (building upon two prior modules released in August 2022) introduce Compounded Risk-Free Rates (RFRs) and the practical implications for calculating loan facilities' interest. The additional modules include: 

Compounded RFRs - The Basics: this module provides a high level overview of Compounded RFRs, introducing the basic principles and building blocks that underpin Compounded RFRs. 

Compounded RFRs - Observation Shift: this module explains Compounded RFRs in further detail, highlighting the difference between loan facilities with and without an Observation Shift using worked examples. 

Compounded RFRs - CCR & NCCR: this module introduces, with worked examples, the concepts of Cumulative Compounded Rate (CCR) and Non-cumulative Compounded Rate (NCCR). 

Please note that these modules are intended to be completed in the order noted above and steadily build upon the principles and building blocks introduced in prior modules.