Read The Full Release Here

  • Source: federalreserve.gov

Treliant Takeaway:

Treliant helps global banking institutions manage the transition away from LIBOR settings, which ended for Sterling, Swiss franc, Japanese yen, and euro on December 31, 2021. The transition continues for U.S. dollar LIBOR to its replacement rate Secured Overnight Financing Rate (SOFR) ahead of its cessation in mid-2023. Our consultant team has deep experience helping our global banking clients prepare for and manage the complexity of regulatory change.

Highlights:

On December 16, 2022, the Federal Reserve Board adopted the final rule implementing the LIBOR Act.  As part of the final rule, the Federal Reserve Board confirmed the use of SOFR to replace certain tenors of U.S. dollar LIBOR references (overnight, 1m, 3m, 6m and 12 months tenor) in U.S. law governed contracts. In particular, the final rule established clarity on benchmark replacement for tough legacy contracts i.e. contracts with no clearly defined fallback provisions that expires beyond June 30, 2023.

As part of its final rule, the Federal Reserve Board maintained that different contract types warrant different benchmark replacements:

  1. Derivative Contracts

    Due to significant adherence by derivative market participants to the ISDA 2020 IBOR Fallbacks Protocol, the wide usage of references to SOFR compounded in arears and to minimise disruption to the market, the Federal Reserve Board has selected the Fallbacks Protocol which uses SOFR compounded in arrears plus a stated spread adjustment.

  2. Cash Transaction Contracts

    The benchmark replacement rate for consumer loans will be CME Term SOFR plus the transition tenor spread adjustment (for the one-year period beginning on June 30, 2023) or the tenor spread adjustment specified in the LIBOR Act thereafter.

    In instances where a derivative is executed as a hedge for a cash transaction, it is worth noting that both products will have different benchmark replacement rates and spread adjustments as a result.  Counterparties should be aware of any basis risk exposure and consideration should be given to ensure this risk is appropriately managed throughout the repapering process for their business.