LIBOR Replacement

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The Great Index Reformation is coming.  (I note in passing that the last Reformation led to the 100 Years War…just saying.)  This is a massive change to our market that did not bubble up from the great unwashed on the barricades demanding change, but something that has been driven from the regulatory heights.  More a Peter the Great and less a Lenin sort of thing.  This transformation of the entire floating rate market from LIBOR to SOFR is scheduled to arrive in a market near you on January 1, 2022.  After that date, with very few exceptions, the banks will neither give nor take LIBOR.  Of course, they actually could do so, as the FCA has said that one-month LIBOR will be representative until June of 2023, but the regulators have made it clear that to do so would be considered an unsafe, unsound banking practice and no bank is going to volunteer for that appellation.
Continue Reading LIBOR and SOFR:  Welcome to a Two-Speed Market?

It’s a rule around here that I don’t write on the same topic twice in a row because if you don’t get bored, I will.  I am making an exception this week to revisit last week’s blog about the industry’s failure to take on, or at least discuss, the considerable negative externalities of transferring our entire business from LIBOR to SOFR while we have time.  The problem, of course, and I recommend last week’s commentary for a more fulsome discussion (or screed), is that we are barreling toward a world in which trillions of dollars of floating rate debt will be based on an index that is not credit-sensitive and which may (and likely will) cause a transfer of value from the providers of capital to the users of capital.
Continue Reading It’s Time for The Industry to Engage on SOFR’s Voldemort Problem

To my gentler readers, first an apology for this interregnum in publication.  I’ve been sitting on this commentary like a hen on an egg for weeks.  All I can say is having to work for a living gets in the way of writing about interesting stuff.

It’s now July and supposedly the transition from LIBOR to SOFR is almost already a done deal.  Anyone notice that happening?  Not to bury the lead but it hasn’t happened.  Note that even the ARRC, between harrumphs about the slow take-up of SOFR products, has said that MAYBE they’ll let folks use Term SOFR soon (although they are still being a bit cagey on when and, perhaps more importantly, who will be given that privilege).  That’s not good if we’re gonna base an entire floating rate marketplace on SOFR.Continue Reading The Powers That Be Are Rallying Around SOFR and That’s a Mistake

We’ve written before about our anxiety regarding the fact that SOFR does not really seem fit for purpose to support commercial mortgage lending or indeed any cash product.  (The nonsense about charging interest in arrears should have been a tell, to be honest.)  Of course, the real problem is the absence of a credit-sensitive component to the new index, particularly in this time and place.  That strikes me as almost fatal to the ambitions of the ARRC to remake the market in its image.  SOFR is an open invitation for value transfer from lenders to borrowers at a time when inflation is closer than the horizon and an inexorable climb in the short end of the yield curve is most certainly on offer.
Continue Reading SOFR Transition: It’s Not Done Yet!

First, the ARRC, playing Charlton Heston, playing Moses, brings down from on high the ten commandments of SOFR and lo, we were sore afraid and with veneration, professed we had no God but SOFR.  A solution of sorts to a somewhat self-inflicted problem.  As we have observed before, we continue to think the solution to the problem of bankers diddling LIBOR is to punish bankers and shore up the system to make it more robust and not to blow up trillions of dollars of transactions and 40 years of precedent.  But that train has left the station.
Continue Reading LIBOR: First They Blinked and Now Some Hope, But a New Problem and It’s Big

In the fourth installment of our new LIBORcast program, Matthew Hays and Jonathan Gaynor discussed interest rate caps, derivatives and value transfer with Chatham Financial’s Rob Mangrelli and Matt Hoffman.  Tune in to hear about the cost of a SOFR interest rate cap, adoption of the ISDA protocol and rate fragmentation in the post-LIBOR market.…

Regulators have been increasing their scrutiny of LIBOR transition efforts as they ramp up messaging stressing that the time to act is now.   The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a National Exam Program Risk Alert to introduce a LIBOR Examination Initiative on the upcoming discontinuation of, and transition…

While it seems like the COVID pandemic has taken over every waking moment of our lives, the impending end of LIBOR marches ever onward.  All signs point to a termination date for the troubled benchmarks at the end of 2021, pandemic be damned.

The purpose of this post is not to discuss the road to transition so far, though if you’d like to take a trip down memory lane, here is what we have seen. Instead, we wanted to bring your attention to the fact that, whilst the UK Financial Conduct Authority’s (FCA) momentum continues, COVID has created some bumps in the road, even on the journey to the end of LIBOR.Continue Reading LIBOR – The UK Beat Goes On

COVID-19 has driven anxiety over the LIBOR transition right off almost everyone’s top-of-mind list and yet the crisis is taking no notice of that lack of regard and soldiering on.  The ARRC continues to beaver away, generating guidance and advice and otherwise proselytizing the need to get on with it and be ready for transition on January 1, 2022.

But are the markets listening?  Look at our ardor!  Except for special situations, the use of SOFR, to date, has been a political and not an economic decision for those who have elected to use it.  There is little take-up in the real world and little enthusiasm for doing so.  And what’s with the huge whoops a few weeks ago when SOFR’s March to the Sea was interrupted when the Fed backed off using SOFR in the Fed’s new $6 billion aid program for small and mid-size businesses?  Run away! Run away!  Back to LIBOR!Continue Reading LIBOR: The Monty Python Parrot of Finance

The LIBOR transition plods onward.  Last Wednesday, the Alternative Reference Rates Committee (ARRC) announced its recommended spread adjustment methodology for cash products referencing LIBOR.  Regulators around the world have been clear: interim LIBOR replacement deadlines might slip, but LIBOR’s days are still numbered.  At the end of March, which feels like ten thousand years ago, the Financial Conduct Authority said that “[t]he central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and end-2021 should remain the target date for all firms to meet.”  Amid the constant upheaval as a result of the coronavirus pandemic, isn’t it nice to know that some things aren’t changing?
Continue Reading ARRC Recommended Spread Adjustment Announced