It has taken quite some time to put together, but on 26 October 2023, LMA published an exposure draft of the Term €STR fallback for EURIBOR drafting, including full rate switch language. It is complicated, but commentary and guides have been provided.
It is complex because the working group on euro risk-free rates (the "working group") published recommendations for corporate lending products in 2021, followed by guidelines in May 2023, which are not quick and easy to implement. They had said that market participants should consider either a compounded €STR in arrears fallback or a two-level waterfall solution consisting of a forward-looking methodology (i.e. a term €STR, now provided by EMMI and Refinitiv/FTSE) followed by a compounded €STR in arrears fallback.
There are still issues to be dealt with - for example, the Credit Adjustment Spreads to be used. LMA has left a blank for this, noting that the working group recommendation is the 5 year historical median spread is the preferred approach for cash products.
The euro loan market has been slow to adopt more robust fallbacks despite the recommendations being in place for more than two years. We expect that LIBOR transition projects were the priority for the relevant decision makers, but now that most of the transition work has successfully completed, we expect the market will start to pay more attention to EURIBOR fallbacks. Hopefully, this means the publication by LMA of the exposure draft and related commentary and notes will help move the market forward.
LMA has requested comments and feedback from its members by 8 December 2023.
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