Financial Institutions HorizonsFinancial institutions should be a long wayalong the road alreadyIt is worth summarizing for the benefit of anynon-regulated firms who have exposure to LIBOR,including debt funds, and who may not be asadvanced in their planning as regulated firmswhat action should already have been taken:•a full “drains up” review of all existing LIBORexposures and impacted LIBOR products,both within financial contracts but alsoelsewhere across the business;•development of a comprehensive transactionproject plan, building in relevant industryand regulator recommended best practicesand incorporating customer/investorcommunications explaining the impact of,and intended route to, transition; and•consideration of what operational andaccounting systems and processes will needto be updated to enable use of new risk freerates (RFRs).What is the impact of the ISDA 2020 IBORFallbacks Protocol on transition progress?Adherence to the ISDA IBOR 2020 FallbacksProtocol (the IBOR Fallbacks Protocol) isseen by regulators across the world as a keypart of firms’ LIBOR transition plans and wasdescribed by Andrew Bailey, Governor of the Bankof England, as an important step in the LIBOR“endgame” and by the Board of Governors of theFederal Reserve System (the Fed) as playing animportant role in an orderly transition awayfrom LIBOR.31By adhering to the IBOR Fallbacks Protocol,derivatives counterparties would be incorporatingthe new robust fallback rates that would applyin the event of a permanent cessation of a keyinterbank offered rate (IBOR) and upon a nonrepresentative determination for LIBOR intolegacy derivatives contracts with other adheringcounterparties. The new fallback rates willbe calculated by combining the relevant RFRcompounded in arrears over the relevant IBORperiod with a spread adjustment based on a fiveyear historical median of the differences betweenthe IBOR in the relevant tenor and the relevantRFR over the relevant corresponding period.The FSB released a statement welcoming ISDA’sannouncement and encouraging adherence:“The FSB encourages adherence to the Protocol asa tangible step that can be taken by both financialand non-financial firms to avoid disruptions incovered derivatives contracts if the IBOR theycurrently reference is discontinued or, in the caseof LIBOR, becomes non-representative.”The IBOR Fallbacks Protocol takes effect on25 January 2021 and although adherence isvoluntary, regulators across the globe have saidthat they expect regulated entities to be adheringin a timely manner. Firms that are not regulatedby a financial regulator, such as commercialend-users, can expect their dealer counterpartiesto contact them regarding adherence to the IBORFallbacks Protocol and commercial end-usersshould expect to be encouraged to adhere.For more information, please see our client alert:ISDA 2020 IBOR Fallbacks Protocol:What you need to knowHogan Lovells LIBOR ToolThe Hogan Lovells LIBOR tool tracks thelatest regulatory developments across themajor currency benchmarks, enabling youto keep on top of the evolving picture as youprepare for transition.
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