1489313 - Hogan Lovells FIS Horizons 2021 update - Flipbook - Page 31
Financial Institutions Horizons
Financial institutions should be a long way
along the road already
It is worth summarizing for the benefit of any
non-regulated firms who have exposure to LIBOR,
including debt funds, and who may not be as
advanced in their planning as regulated firms
what action should already have been taken:
•
a full “drains up” review of all existing LIBOR
exposures and impacted LIBOR products,
both within financial contracts but also
elsewhere across the business;
•
development of a comprehensive transaction
project plan, building in relevant industry
and regulator recommended best practices
and incorporating customer/investor
communications explaining the impact of,
and intended route to, transition; and
•
consideration of what operational and
accounting systems and processes will need
to be updated to enable use of new risk free
rates (RFRs).
What is the impact of the ISDA 2020 IBOR
Fallbacks Protocol on transition progress?
Adherence to the ISDA IBOR 2020 Fallbacks
Protocol (the IBOR Fallbacks Protocol) is
seen by regulators across the world as a key
part of firms’ LIBOR transition plans and was
described by Andrew Bailey, Governor of the Bank
of England, as an important step in the LIBOR
“endgame” and by the Board of Governors of the
Federal Reserve System (the Fed) as playing an
important role in an orderly transition away
from LIBOR.
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By adhering to the IBOR Fallbacks Protocol,
derivatives counterparties would be incorporating
the new robust fallback rates that would apply
in the event of a permanent cessation of a key
interbank offered rate (IBOR) and upon a nonrepresentative determination for LIBOR into
legacy derivatives contracts with other adhering
counterparties. The new fallback rates will
be calculated by combining the relevant RFR
compounded in arrears over the relevant IBOR
period with a spread adjustment based on a fiveyear historical median of the differences between
the IBOR in the relevant tenor and the relevant
RFR over the relevant corresponding period.
The FSB released a statement welcoming ISDA’s
announcement and encouraging adherence:
“The FSB encourages adherence to the Protocol as
a tangible step that can be taken by both financial
and non-financial firms to avoid disruptions in
covered derivatives contracts if the IBOR they
currently reference is discontinued or, in the case
of LIBOR, becomes non-representative.”
The IBOR Fallbacks Protocol takes effect on
25 January 2021 and although adherence is
voluntary, regulators across the globe have said
that they expect regulated entities to be adhering
in a timely manner. Firms that are not regulated
by a financial regulator, such as commercial
end-users, can expect their dealer counterparties
to contact them regarding adherence to the IBOR
Fallbacks Protocol and commercial end-users
should expect to be encouraged to adhere.
For more information, please see our client alert:
ISDA 2020 IBOR Fallbacks Protocol:
What you need to know
Hogan Lovells LIBOR Tool
The Hogan Lovells LIBOR tool tracks the
latest regulatory developments across the
major currency benchmarks, enabling you
to keep on top of the evolving picture as you
prepare for transition.
