LIBOR Transition Update – September 2021

Latest Developments

It’s Been a Big Quarter for SOFR

  • • The NY Fed’s ARRC launched the ‘SOFR First’ initiative in late July, which recommended that inter-dealer swap traders migrate to Term SOFR. In the initial days of the process, trading volumes for SOFR swaps by DV01 rose from around 3% to over 20%. On July 29th, ARRC formally endorsed Term SOFR. Term SOFR rates are akin to 1-month and 3-month LIBOR rates, where the typical SOFR is an overnight rate.
  • Read ARRC’s release here

Regarding Term SOFR use, ARRC made some recommendations:

  • Term SOFR is acceptable for most business loans.
  • Term SOFR derivatives can be used by those businesses for hedging their rate risk – this is convenient for consumer and business borrowers who want to avoid basis risk.
  • Term SOFR should not be used for derivatives between dealers, as it could undermine the overnight SOFR rates effectiveness and therefore the inherent construction of Term SOFR rates.
  • Read the Best Practices in full here
  • FAQ to the Best Practices here

Next up, the Cross-Currency Swap Market

  • The ‘RFR First’ initiative, whereby the cross-currency swap market will switch from Libor to risk-free rates for US dollar, sterling, Swiss franc and Japanese yen, will occur on September 21. The euro currency is expected to join in the fun by year end.
  • Read more here

Risk-Free Rate Adoption Marches Higher

  • ISDA and Clarus have an indicator for risk-free rate adoption that moved from 11.7% to 14.1% of the market in July based on cleared OTC and exchange-traded interest rate derivatives in six major currencies. SOFR derivative usage was 7.4% of total US dollar rates trades, up from 6% in June. Japanese RFR contracts are currently the most-adopted.
  • Read more about the report here

News and Notes

  • It’s been 15 years, but ISDA (International Swaps and Derivatives Association) has released an update to its definitions! The 2021 Definitions, likely longer than the 157 pages needed to capture the 2006 Definitions, can be yours for $700 (only $350 for ISDA members). They changes discuss many parts of the ISDA Master and Schedule, including Calculation Agent, Floating Rate Option types, fallbacks, option exercise and cash settlements.
  • Read about the differences between the 2006 and 2021 versions here
  • Freddie Mac has recommended rate cap extensions for all existing floating rate borrowers with LIBOR interest rate caps that don’t extend to the loan maturity or June 30, 2023 – before the end of the year. But let’s look at the alternatives and costs before pulling the trigger! There are a few ways to handle this situation – reach out to us to discuss your specific loan.