On August 3, 2020, the US Alternative Reference Rates Committee ("ARRC") hosted the penultimate session in its SOFR Summer Series: Approaching the Transition.

During the past month in particular, there has been a tangible shift from tweaking fallback language to focusing on the practicalities of implementing benchmark transition, and that clearly was the focus of the August 3 webcast.

Here are some of the key takeaways that resonated with us:

  1. All parties must analyze current portfolios and understand IBOR exposures. Not only do these exposures vary by product and currency, but fallbacks themselves within product categories have evolved during preparations for transition over the past few years. Operational readiness, both internal and with vendors, depends on IBOR exposures being identified and understood at a granular level.
  2. Be sure to understand all of the aspects of transition that must be addressed, including financial, valuation, accounting, tax, disclosure and strategic facets.
  3. While financing agreements rightly are a key focus area, market participants also must put transition plans in place for all of their various contracts that use IBOR to calculate interest and damages, including inter-affiliate loans, employee benefit programs, investments, asset purchase and sale agreements, and supply contracts and power purchase agreements.
  4. The market must develop solutions that are workable for borrowers and lenders of all types in order to minimize value transfer at the time of IBOR transition.
  5. Test the various available fallback options under consideration in the market and determine which works best for your institution.
  6. Be prepared to implement transition on time. The volume of contracts that will need to be amended toward the end of 2021 if parties continue to resist hardwired fallbacks will be overwhelming.
  7. There are many tools in the market-from regulators, trade groups and other sources-so there is no excuse for delaying transition preparation and implementation. Stop digging the hole!
  8. Buyers are concerned NOW about purchasing investments that do not contain appropriate fallback provisions.
  9. The combination of regulatory recommendations regarding the date by which (a) LIBOR no longer should be used (the end of 2Q21, at the latest) and (b) lenders still using the amendment approach should advise borrowers of their intended replacement rate (at least six months prior to transition) means that market participants actually have less than a year to be ready for IBOR transition.
  10. December 31, 2021, will be here in the blink of an eye!

Originally published 3 August 2020.

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