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Latest Regulatory Developments of IBOR Reform (2020Q1)

Insights SRD/New York Research Center

ARRC Releases Recommendations for Interdealer Cross-Currency Swap Market Conventions

On January 24, the Alternative Reference Rates Committee (ARRC) released its final recommendations for new interdealer cross-currency basis swaps that use Secured Overnight Financing Rate (SOFR) and overnight risk-free rates (RFRs) recommended by National Working Groups (NWGs) in other jurisdictions. The conventions outlined in the document are for voluntary use by market participants and consist of three sections focusing on interdealer transactions. The first section covers conventions for RFR-RFR cross-currency swaps, while the second covers RFR-IBORs cross-currency swaps and the third covers potential fallbacks for cross-currency swaps currently referencing IBORs and focusing on the prospect of one or both counterparties in an IBOR-based swap transitioning from an IBOR to an RFR.

 

ARRC Releases Vendor Survey and Buy-Side Checklist on Transition to SOFR

On January 31, the ARRC released two items developed by its Operations/Infrastructure Working Group: a vendor survey and a buy-side checklist. Both documents are intended to support market participants’ work to address operational challenges in the transition from USD LIBOR to the SOFR, which is the ARRC’s recommended alternative to USD LIBOR. As noted in the accompanying letter, the survey serves as a self-assessment tool for software and technology vendors to assess their own readiness, while also serving as a platform to raise operational issues to the ARRC. The checklist provides steps that buy-side firms can consider when transitioning from LIBOR.

 

ARRC Welcomes the Federal Housing Finance Agency's Decision to No Longer Accept Adjustable Rate Mortgages Based on LIBOR by Year-End, and to Begin Accepting Those Based on SOFR

On February 5, The ARRC welcomed the Federal Housing Finance Agency’s (FHFA) announcement that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac will stop accepting adjustable-rate mortgages (ARMs) based on LIBOR by the end of 2020, and the GSEs’ announcements that they plan to begin accepting ARMs based on the Secured Overnight Financing Rate/SOFR later in 2020. SOFR is the ARRC’s recommended alternative to USD LIBOR.

 

ISDA Released Research Notes “Adoption of Risk-Free Rates: Major Developments in 2020”

On February 12, ISDA released a research note titled “Adoption of Risk-Free Rates: Major Developments in 2020.” This paper examines several major upcoming developments in 2020 related to the adoption of RFRs, including the publication of new benchmark fallbacks for derivatives contracts and central counterparty changes in discounting and price alignment interest for certain currencies.

 

ARRC is preparing the Best Practice Recommendations to layout the schedule

On February 17, The ARRC, in consultation with, and pursuant to its mandates from the Federal Reserve System and the Federal Reserve Bank of New York, developed a set of recommended best practices to help ensure that market participants are prepared for the cessation of U.S. dollar (USD) LIBOR by the end of 2021. Here are some of the ARRC’s Best Practice Recommendations relate to our business:

  • After 2020Q2: All new LIBOR-linked business loans should have ARRC Hardwire fallback;
  • After 2021Q1: No business loans should use LIBOR; 
  • After 2021Q2: Previously choose amendment fallback contracts should determine the alternative rate.

 

The Federal Reserve Bank of New York is now publishing 30-, 90- and 180-day SOFR Averages and a SOFR Index

Upon the inaugural publication on March 2, Wipf said: “The SOFR Averages and Index equip market participants with consistent, accessible prints that are produced by the official sector. They are also available today for immediate use. Market participants should use them to create new SOFR-based contracts, instead of precariously growing LIBOR exposures and waiting for the development of a forward-looking term SOFR.” 

 

ARRC Releases a Proposal for New York State Legislation for U.S. Dollar LIBOR Contracts

On March 6, the ARRC released a proposal for New York State legislation to minimize legal uncertainty and adverse economic impacts associated with the LIBOR transition. The legislation aims to address issues associated with LIBOR-based financial contracts that either do not have adequate fallback language or have language that could dramatically alter the economics of contract terms if LIBOR is discontinued. 

 

FASB Issues Accounting Standards Update

On March 12, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. It provides expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued.

 

ARRC Sent Comment Letter On The Proposed Tax Relief Guidance Released By Treasury and the Internal Revenue Service

On March 24, the ARRC sent a letter to the U.S. Treasury Department and the Internal Revenue Service about the proposed regulations regarding guidance on the IBOR transition. The letter describes the proposed regulations as “comprehensive” and “addressing most of the concerns raised by the ARRC in a manner that gives significant flexibility to taxpayers seeking to transition away from IBORs.” In the letter, the ARRC provided a number of recommendations intended to facilitate market participants’ ability to rely on the proposed regulations as they act to transition legacy IBOR contracts.


 

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