Pub. 8 2020 Issue 4

www.uba.org 4 2021: AN ODYSSEY AWAY FROM LIBOR T he 1980s were a much different time than today. Many of us remember or are too young to remember an age where the typ- ical computer only had 64 kilobytes of memory or where cell phones weighed as much as 20 pounds; no one anticipated we would ever call them smart any time soon. The 1980s were also a period of change for global economics and banks. In 1986, the London Interbank Offering Rate (LIBOR) was officially introduced and published as an interest rate bench- mark for widespread usage by financial and non-financial firms in response to banks trading in new interest markets. However, over three decades later, after determining that LIBOR was vulnerable to interest rate manipulation, it was an- nounced that the benchmark rate would be discontinued beginning Dec. 31, 2021. This discontinuation meant that many businesses, banks included, would have to take the arduous transition away from using LIBOR in the future and address existing products that already use it. Under normal circumstances, 2020 was supposed to be a significant year in the transition away from LIBOR. However, the financial impact of the COVID-19 pandemic may have caused a shift in priorities for many banks. While regula- tors have provided a temporary reprieve in several banking areas for this year, it still stands today that LIBOR will no longer be here after 2021. To underscore the crucial need to address this issue by that deadline, the Financial Security Board (FSB) published a 2020 Progress report on the year of transition away from LIBOR. As the transition remains a global priority, the FSB also included a roadmap of milestones that banks should follow to navigate this process in a time- ly manner. The FSB report addresses how the COVID-19 pandemic has been a “defining feature of the past year with widespread implications.” Understandably so; the pandemic has impacted many firms in their transition away from LIBOR. Still, according to a survey of FSB members, it has not created pressing substantive road- blocks to the transition. The report states that the direct correlation between LIBOR and banks’ overall borrowing costs weak- ened during the pandemic, with volatility leading banks to scarcely rely on LIBOR markets for funding. Those that did use LIBOR rates faced challenges because of the pandemic. While central bank rates were decreasing throughout the world, LIBOR rates were increasing, and those rates were passed on to borrowers when financial systems were supposed to play a role in providing much-needed liquidity. Despite pandemic induced market dis- ruptions, the FSB states that progress has been made throughout the past year in the transition. Many national work- ing groups have produced their timely roadmaps as guides that have been widely adopted while also considering the economic impact of COVID-19. Over the past year, the FSB continued to work with the International Swaps and Deriv- atives Association (ISDA) to address the transition away from LIBOR in deriv- ative contracts. In October 2020, ISDA released amendments to its definitions and protocols with these contracts and included new fallback language used by firms. This past year, more have adopted the Secured Overnight Financing Rate (SOFR) as the preferred alternative in U.S. dollar markets. Significant progress has indeed been made, and while regula- tors have launched a number of initia- tives, what remains is for both financial and non-financial firms to globally lead By Tim Dominguez, Associate General Counsel, Compliance Alliance COMPLIANCE CORNER