By Shannon Manders, ITFA Consultant

The transition from Libor to risk-free rates is a topic of top priority for ITFA, given the impact on its members involved in trade risk and asset origination and distribution, the ongoing uncertainty around forward-looking term rates, and a general lag in regulatory guidance on the matter.

To date, the association has issued a number of notices and papers to provide guidance on market developments and recommended actions related to the transition. These have been produced by ITFA’s own Market Practice Committee – including material from legal advisor Sullivan – and with some input from other industry associations, such as BAFT and the ICC.

ITFA, together with its partners, has also been engaging with industry working groups to advocate that forward-looking rates are most suited to trade finance and other working capital transactions.

Most recently, an April 2021 update covers developments of particular relevance for PRA/FCA-regulated banks in the UK, while a February progress note takes a look at the impact of Libor transition on the BAFT Master Participation Agreement (MPA). ITFA has informed members that reference to Libor in the MPA will be replaced with an alternative benchmark once there is greater clarity on the constitution of an alternative rate for each relevant currency. It’s likely that another note will be issued shortly on this last matter, giving an indication of the likely changes to the MPA forms in anticipation of the actual updates to the documents.

“ITFA’s strategy on the whole is one of guidance, interpretation and collaboration with other associations – while ensuring that what we’re communicating is relevant to our members’ trade finance and secondary market business,” says ITFA Chair Sean Edwards.

The path to Libor transition is complex and there are multiple legal and regulatory efforts – past, ongoing and anticipated – to keep track of.

Going forward, an important component of ITFA’s strategy is a new online repository of information, which has recently been launched. The ITFA-TFG Libor Hub‘ provides banks, corporates and practitioners access to market developments, timelines and resources on the change from Libor to risk-free rates, including the potential legal, commercial and regulatory implications. It is hosted on the TFG website.

“The aim of the hub is to create an extensive and easy-to-navigate educational resource that can be accessed by all members – many of whom represent smaller institutions that may not be as well-equipped in terms of resources as some of their larger peers,” says Edwards.

An ever-shifting landscape

Vigilance is required among all players in the industry to track market progress and deadlines, and ensure documentation is properly reviewed and adapted.

But this is no easy feat, given that as some questions are being answered, new ones are being raised.

There have been multiple new developments in the last few weeks alone: in late May, the Alternative Reference Rates Committee (ARRC) – the US industry group – announced it has selected CME Group as the administrator that it plans to recommend for a forward-looking Secured Overnight Financing Rate (SOFR) term rate, once market indicators for the term rate are met. (This follows its previous announcement, just a few months prior, that market participants in the US dollar market should carry on without a SOFR term rate for US dollar transactions.)

Elsewhere, the Loan Market Association (LMA) recently published a further suite of documentation to facilitate the syndicated loan market in transitioning away from the use of Libor to risk-free rates.

Given the uncertainty that continues to persist, the next big talking point for the industry is likely to be around fallback rates, says Geoff Wynne, Partner and Head of Trade and Export Finance at Sullivan.

“Even if term SONIA (Sterling Overnight Index Average) is up and running – as has been the case since the end of March – and term SOFR may be soon, we will need a market provider of fallback rates in the event that one of those is not published,” says Wynne.

ITFA continues to encourage members to find other ways of pricing their assets during a potential period in which term rates are not available after the relevant Libor ceases to operate in a particular member jurisdiction.

Next steps

As we move towards the end of the year, when Libor settings will cease to be provided by administrators, or no longer be representative, ITFA also encourages its members who have not already done so to set up internal working groups to analyse whether their systems, operations, and documentation could smoothly adapt to new practices when alternative rates are in place.

“It’s very difficult to navigate because there’s still so much uncertainty, but you’ve got to be ready, and you’ve got to think it through,” says Wynne. “It’s likely that the bigger banks have already done so – I suspect there isn’t a big bank that hasn’t got its own wording. But, of course, it wrote its wording before the most recent developments. So it has now got to retest that wording against what will happen when, for example, ARRC finally reveals its use cases for SOFR.” 

He adds: “The problem is that the regulator is not going to take the lead, in the sense of saying, ‘here is Libor’s replacement’. Instead, it wants to know that banks are prepared, and that the rates banks are offering are transparent. That’s the magic word – transparency.”

As ITFA has noted in a previous guidance paper, the use of cost of funds – although acceptable to a number of banks – is likely to be unpopular with regulators.

In the coming months, as there is – hopefully – greater clarity around the situation, especially in terms of the use of term rates, ITFA intends to provide its members with more direction on the matter.

“The guidance to date has been focused on trying to explain what recent developments mean for the industry. It’s still very early on, and there’s no market alignment as yet. The next step – once we’re aware of all the industry solutions – is to move beyond providing updates to our members, and help members understand how to determine which solutions might be most appropriate for their needs,” says Paul Coles, ITFA Board Member and head of the Market Practice Committee.

ITFA members can expect more papers – especially in relation to dollar terms. The Libor transition topic will continue to be discussed at online events (such as the recent webinar hosted by the Northern European Regional Committee), as well as at ITFA’s annual conference in Bristol in early October.

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