Welcome to KPMG’s latest issue of our monthly LIBOR newsletter in which we provide updates on LIBOR and other benchmark interest rate developments that directly impact banks and consider the potential implications of the related regulatory requirements.

Regulatory Updates

1 .HKMA issues update on the transition milestones in relation to the interest rate benchmark reform

The Hong Kong Monetary Authority (HKMA) has published an update regarding the transition milestones previously issued in July 2020 in relation to the interest rate benchmark reform. The HKMA pointed out that its latest survey results show substantial achievements regarding the first two transition milestones, as the vast majority of AIs are now in a position to offer financial products referencing SOFR or SONIA and nearly all of them have signed up to the ISDA IBOR Fallbacks Protocol. With respect to the third transition milestone, in light of the FCA announcement earlier regarding the updated LIBOR cessation timeline, latest developments from other authorities as well as industry’s feedback, the HKMA and the TMA indicated that it would no longer be appropriate for market participants to stick to the earlier timeline to cease issuing new LIBOR-linked products by the end of June 2021. Nonetheless, AIs should continue to press ahead with their current transition preparations and should cease to issue new LIBOR-linked contracts by the end of 2021.

KPMG’s perspective: The updated announcement by HKMA allows an additional 6-month period for market participants to cease issuing new products referencing LIBOR and switching to offer the relevant ARR products by the end of 2021, thus also addressing industry concerns with respect to difficulties in offering products referencing new ARRs given the limited client awareness in the local market as well as lack of readiness of some term ARRs. The adjusted timeline would allow more time for Banks to structure and refine their ARR products in terms of contract readiness, pricing models, operational and system upgrades and risk management aspects. However, as suggested by HKMA, Banks should not slow down their preparations regarding legacy LIBOR contracts migration, re-negotiation, and new ARR product issuance, and should continue to transition proactively by reaching out to existing customers to ensure a timely and smooth transition.

25 March 2021, HKMA

2. BOT decision to continue publication of THBFIX until Mid-2023

The Bank of Thailand (BOT) has recently announced that the publication of THBFIX rate, which makes use of USD LIBOR in its calculation, will be discontinued after 30 June 2023 as Thailand is preparing for the transition to a new interest rate benchmark – THOR. This announcement is related to the latest confirmation from the UK Financial Conduct Authority (FCA) which confirmed that the publication of overnight and 12-month USD LIBOR tenors will continue until 30 June 2023.

Nonetheless, Banks should not issue any new loans, bonds, and structures notes using THBFIX after 30 June 2021 given that USD LIBOR rates will no longer be representative after end-2021. As for legacy contracts, the BOT has already started publishing fallback rate to be used for THBFIX, and according to the ISDA guidance, the fallback rate would applied instead of THBFIX on or after 1 July 2023 (on the first London Banking Day).

KPMG’s perspective: Based on the newly updated cessation timeline for THBFIX set by BOT, FIs are encouraged to reduce their THBFIX exposure, especially for loans, bonds and structures notes as soon as possible. Also, despite the recent FCA announcement confirming that the cessation timeline for overnight and 12-month USD LIBOR has been postponed to 30 June 2023, Banks should actively prepare to transition to THOR at an early stage before such date. Moreover, FIs are encouraged to follow closely on BOT arrangement for fallback rate to be used for THBFIX to have a better transition planning.

19 March 2021, BOT

3. HKMA encourages market participants to continue efforts in preparing for the LIBOR transition

Edmond Lau, Senior Executive Director of the Hong Kong Monetary Authority (HKMA) delivered a keynote address at the ISDA Virtual Conference on 17 March 2021, of which highlighted three essential elements for the LIBOR transition including operational and system capabilities, effective coordination, and full commitment and support from the top management of the Bank. Edmond Lau suggested the “3Cs” should serve as a useful tool for individual institution to attain the LIBOR transition goal, and that a smooth transition would require collective and timely efforts from all parties through bilateral and multilateral negotiation. Furthermore, Edmond Lau urges that all market participants to continue collaborative efforts in preparing for the LIBOR transition and to make best use of the ISDA Fallback Protocol and Supplement in these collective efforts.

KPMG’s perspective: Banks are encouraged to refer closely to the three elements raised by the HKMA to monitor and assess their transition process in areas such as IT system set-ups, operational model adjustments, risk management and accounting system upgrades, as well as promoting market awareness to customers to facilitate the transition. Banks are also strongly encouraged to complete adherence to the ISDA Fallback Protocol and Supplement if they have not already done so, and to proactively reach out to existing clients to negotiate legacy derivative contracts in a timely manner. Moreover, as suggested by the HKMA, senior management of the Bank should also pay close attention to the resources allocation, action plan formulation, and stakeholders engagement while overseeing the bank-wide transition plan as a whole.

17 March 2021, HKMA

4. Fed issues examiner guidance for assessing supervised institutions’ LIBOR transition plans

The Federal Reserve (Fed) issued a supplementary examiner guidance aiding Bank examiners on how to assess supervised institutions’ progress in preparing for the LIBOR transition. The examiner guidance complements the interagency statement issued by the Fed in November 2020 which encourages supervised firms to stop entering into new contracts that reference LIBOR after December 31, 2021 if practicable due to safety and soundness risks concerns. Separate attachments are included for institutions with less than $100 billion in total consolidated assets, and those with $100 billion or more in total consolidated assets. The attachments outlined 6 key aspects which should be considered to assess the transition efforts: (1) transition planning; (2) financial exposure measurement and risk assessment; (3) operational preparedness and controls; (4) legal contract preparedness; (5) communication; and (6) oversight. If assessments conducted suggest an institution may not be on track for LIBOR transition or may not be ready to cease issuing LIBOR-based contracts by December 31, 2021, supervisory actions may be imposed before the end of 2021.

KPMG’s perspective: The Fed’s statement re-emphasizes the importance for Banks to cease issuing new LIBOR-based contracts by December 31, 2021. Banks should be aware of potential supervisory actions if they could not complete the transition between now and the end of 2021 and could also reference to Fed’s guidance on assessing firms’ LIBOR transition efforts ongoingly to keep track of the Bank’s transition progress.

9 March 2021, Fed

5. BoE to consult on SONIA clearing mandate

The Bank of England (BoE) prepares to consult on whether financial counterparties should be mandated to centrally clear SONIA swaps with maturities beyond three years which would result in longer-dated trades linked to GBP LIBOR’s successor rate losing their exemption from the derivatives clearing obligation. The new clearing mandate for SONIA swaps is unlikely to take effect before year-end and the BoE’s extension would apply to SONIA only and it is not expected to cover other LIBOR successors such as SOFR or €STR.

KPMG’s perspective: Clearing mandate may be applied to SONIA swaps subject to BoE’s final decision, as SONIA liquidity is matching LIBOR liquidity and the risk-free rates has become the new de facto market standard. FIs are suggested to set plans to monitor its SONIA swaps with maturities beyond three years to prepare for BoE’s final decision after the consultation to meet regulatory expectations.

9 March 2021, Risk.net

6. BOJ and FSA respond to the announcement on the end date of LIBOR panel publication

Bank of Japan (BOJ) and Financial Services Agency (FSA) issued response to the Financial Conduct Authority (FCA) announcement restating actions required towards the end of 2021 when panel-based JPY LIBOR will cease. Either active conversion to alternative reference rate (ARR) or insertion of fallback language would be deemed necessary for legacy contracts migration. FIs should confirm with the Roadmap released by Cross-Industry Committee and its own transition plan. It is important to note that even FCA compel ICE Benchmark Administration (IBA) to publish synthetic yen LIBOR after end-2021, its use would be restricted to legacy contracts that cannot be feasibly transitioned away from LIBOR (i.e. tough legacy contracts) and it will be published for an additional year only. Synthetic yen LIBOR could only be regarded as a ‘safety net’ for tough legacy contracts and should not be used in new contracts and transactions as it will be produced using an alternative methodology differing from panel-based LIBOR.

KPMG’s perspective: As BOJ’s statement reiterated the importance to transition away from panel-based JPY LIBOR by the end of the year, market participants should ensure that relevant ARR conversion and legacy contract re-negotiations are on track to be completed before the end of 2021, as BOJ has made clear that potential publication of synthetic yen LIBOR would be intended for tough legacy contracts only. FIs could also consider setting up communication plans and roadmap for its legacy yen LIBOR contract renegotiation with customers to incorporate appropriate fallback terms for legacy yen LIBOR contracts or to switch to the relevant ARR contracts.

8 March 2021, BOJ

7. IBA publishes feedback statement for the consultation on its intention to cease the publication of LIBOR settings

ICE Benchmark Administration (IBA) has previously published a consultation on 4 Dec 2020 on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021 and cease the Overnight and 1, 3, 6 and 12 Month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.

Further to the previous consultation paper, IBA has published a feedback statement on 5 March indicating that it would not publish the relevant LIBOR settings on a representative basis after the set dates as sufficient panel bank support would be absent. FCA also confirmed that they will not compel IBA to continue publishing the 26 LIBOR settings as synthetic LIBOR after the relevant cessation date.

KPMG’s perspective: Based on the feedback from the consultation, IBA has to cease the publication of:

  • the following LIBOR settings, to take effect immediately after the publication of LIBOR on Friday, December 31, 2021:
    • EUR LIBOR - all tenors (Overnight, 1 Week, 1, 2, 3, 6 and 12 Months);
    • CHF LIBOR - all tenors (Spot Next, 1 Week, 1, 2, 3, 6 and 12 Months);
    • JPY LIBOR - all tenors (Spot Next, 1 Week, 1, 2, 3, 6 and 12 Months);
    • GBP LIBOR - all tenors (Overnight, 1 Week, 1, 2, 3, 6 and 12 Months);
    • USD LIBOR - 1 Week and 2 Months; and
  • the following LIBOR settings, to take effect immediately after the publication of LIBOR on Friday, June 30, 2023:
    • USD LIBOR - Overnight and 1, 3, 6 and 12 Months,

unless the FCA exercises its proposed new powers (which are included in the current Financial Services Bill as proposed amendments to the UK Benchmarks Regulation) to require IBA to continue publishing these LIBOR settings using a changed methodology (also known as a “synthetic” basis).

5 March 2021, IBA

8. FCA announced timeline on future cessation and loss of representativeness of the LIBOR benchmark rates

The Financial Conduct Authority (FCA) issued a statement on 5 March to confirm the timeline for the cessation and non-representativeness of the 35 LIBOR benchmark settings currently published by the ICE Benchmark Administration (IBA). Publication of all 7 euro LIBOR settings, all 7 Swiss franc LIBOR settings, the Spot Next, 1-week, 2-month and 12-month Japanese yen LIBOR settings, the overnight, 1-week, 2-month and 12-month sterling LIBOR settings, and the 1-week and 2-month US dollar LIBOR settings will cease immediately after 31 December 2021 and the publication of the overnight and 12 Month USD LIBOR settings will cease immediately after June 30, 2023.

The FCA has advised IBA that it has no intention of using its proposed new powers to require IBA to continue the publication of the LIBOR rates beyond the above intended cessation dates for such settings. Meanwhile, the FCA also confirmed that it does not expect any LIBOR settings to become unrepresentative before the above-intended cessation dates.

The FCA has also advised that it will consult on using the proposed new powers included in the Financial Services Bill to require IBA to continue publishing 1-month, 3-month and 6-month sterling LIBOR on a changed methodology (synthetic basis) for a further period after the end of 2021, and one-month, three-month and six-month yen LIBOR on a synthetic basis for an additional year after end-2021. The FCA will also consider if they would request for continued publication on a synthetic basis of the 1-month, 3-month and 6-month US dollar LIBOR settings for a further period after the end of June 2023.

KPMG’s perspective: FCA’s announcement confirms the final timeline of the cessation arrangement or loss of representativeness of the 35 LIBOR benchmark settings after the recent consultation conducted by IBA. All 35 LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after the cessation dates set out above. The representativeness of the 9 settings for certain GBP, JPY and USD LIBOR rates with potential publications on a synthetic basis would not be restored after the cessation dates set out above.

The announcement helps to resolve the doubts from the industry regarding the potential extension of the publications of LIBOR rates. AIs should be aware of this final LIBOR cessation timeline and stick with the updated transition timeline issued by the HKMA on 25 March in response to the FCA announcement.

5 March 2021, FCA

9. FSC announced selection of Korea’s new risk-free rate

South Korea’s Financial Services Commission (FSC) published a statement regarding its selection of the country’s new risk-free rate (RFR) as the overnight repo rate of Korean Treasury Bonds and Monetary Stabilization Bonds after a 20-month selection process. The selection was mainly based on the repo market’s abundant liquidity and its expandable use in the derivatives markets. The calculation and disclosure of RFR will be made by the Korea Securities Depository and the new RFR will be published as soon as possible during Q3 this year.

The new RFR would serve as an alternative and fallback rate for the certificate of deposit rate, which is currently widely in use in international derivatives transactions. The regulator also plans to promote and facilitate the use of the new RFR by listing RFR futures by year-end and offering incentives to financial institutions. The FSC also intends to promote trading in RFR-based overnight index swaps and issue RFR-linked floating rate notes through policy banks within next year. FSC also highlighted that fallback provisions should be provided to existing LIBOR-based contracts with post-2021 maturities before the third quarter of this year. Authorities would monitor financial institutions’ LIBOR exposures, response plan and consumer protection measures to ensure a seamless transition to LIBOR.

KPMG’s perspective: The announcement made by FSC provides important insight into the new Risk-free Rate in Korea. Although FSC did not propose a strict timeline for transition to the new RFR at the moment, banks and investors should start to take prompt action to prepare for the transition of their LIBOR-based exposure to address regulatory expectations and transition milestones proposed. Following FSC’s announcement, FIs should start planning comprehensive customer education and communication regarding the transition to the new RFR. Similar to other jurisdictions, Banks are also encouraged to be in a position to launch new products that are referenced to the new RFR as soon as possible once the details are released by the FSC.

26 February 2021, FSC

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Industry Update

1. ARRC releases supplemental recommendation of hardwired fallback language for syndicated and bilateral business loans

The Alternative Reference Rates Committee (ARRC) released supplemental versions of its recommendation of hardwired fallback language for syndicated and bilateral business loans referencing USD LIBOR. The supplemental recommendations provided a simplified version of the final recommended fallback language previously issued by ARRC for syndicated business loans and bilateral business loans, with incorporation of the certainty on fallback timing and economics following the announcements made by FCA and IBA on 5 March. Market participants may choose to use either the original fallback language issued in 2020 or the simplified fallback language issued in 2021 as they deemed fit as both versions would lead to the same outcome at transition as indicated by the ARRC.

KPMG’s perspective: As we approach more and more towards the first cessation timeline by the end of the year, Market participants are suggested to refer to the abridged version of ARRC recommended fallback language to support the active transitioning business loans as a critical additional guidance to accelerate their current transition progress. Moreover, as legacy contract re-negotiation would be one of the main focus for Banks to achieve before the end of December 2021, Banks could also make use of the supplemental versions of the ARRC recommended fallback language to update their current amendment clauses as well as benchmarking against other peer Bank’s practices continuously before the end of the year.

25 March 2021, ARRC

2. ARRC encourages market participants to transition without reliance on the SOFR term rate

The Alternative Reference Rates Committee (ARRC) published an update on the forward-looking SOFR term rate further to their previous Term Rate Request for Proposals (RFP) by stating that they would not be in a position to recommend a forward-looking SOFR term rate by mid-2021, and encourages market participants to continue their LIBOR transition efforts based on their current available tools. The ARRC added that while there has been an increase in SOFR derivatives trading activity, they believe that it is not yet in a position to recommend a term rate with confidence based on the current level of liquidity in SOFR derivatives markets. In light of the U.S. supervisory guidance encouraging Banks to cease entering into new LIBOR-referenced contracts as soon as practicable in any event by December 31 2021, the ARRC further urges market participants not to wait for a forward-looking term rate, but continue to transition utilising current tools and market information, for example the SOFR averages and index data.

KPMG’s perspective: The ARRC announcement further confirms that the market would not be expecting a robust forward-looking term rate by the end of 2021, thus market participants should continue their current transition progress as scheduled for legacy product migration and new ARR-referenced product development. Banks should also prepare their internal pricing strategies and frameworks referencing the in advance or in arrears SOFR averages readily available in the market. Banks should also be prepared to use SOFR in arrears / in advance as the primary vehicle for the LIBOR transition instead of relying on the development of a forward-looking term rate.

23 March 2021, ARRC

3. ARRC announces Refinitiv as publisher of its spread adjustment rates for cash products

The Alternative Reference Rates Committee (ARRC) announced that Refinitiv has been selected as the publisher of its recommended spread adjustments and spread adjusted rates for cash products. The vendor was selected to publish the ARRC-recommended spread adjustments to SOFR-based rates and spread-adjusted SOFR-based rates for cash products planning to transition away from USD LIBOR. The rate will be used to address situations upon the cessation or loss of representativeness of the USD LIBOR where contracts containing the ARRC-recommended fallback provisions will switch to a spread-adjusted ‘fallback rate’, which is the rate that a contract indicates should be used if its base rate becomes unavailable. This arrangement is analogous to the fallback rates included in International Swaps and Derivatives Association (ISDA)’s IBOR protocol for derivative contracts, which is SOFR plus the relevant fixed spread adjustment.

KPMG’s perspective: The spread-adjusted rates to be published by Refinitiv would be useful for market participants while designing and developing SOFR-based cash products in terms of their pricing structure. Banks and FIs could also keep a close eye on any other technical development from other market vendors (i.e. Bloomberg) on the spread adjustments for transitioning products to construct and refine their ARR product pricing strategies.

18 March 2021, ARRC

4. ARRC confirms a “Benchmark Transition Event” has occurred under ARRC fallback language

The Alternative Reference Rates Committee (ARRC) issues statement confirming that in its opinion the March 5, 2021 announcements made by the IBA and the FCA on future cessation and loss of representativeness of the LIBOR benchmarks constitutes a ‘Benchmark Transition Event’ with respect to all USD LIBOR settings under the ARRC recommendations regarding more robust fallback language for new issuances or originations of LIBOR floating rate notes, securitizations, syndicated business loans, and bilateral business loans. Institutions could also refer to the ARRC FAQs Regarding the Occurrence of a Benchmark Transition Event and ARRC’s previous comment on the decisions outlining the definitive endgame for LIBOR for supplementary information from the ARRC.

KPMG’s perspective:

The occurrence of a Benchmark Transition Event does not require an immediate transition under ARRC-recommended fallback language. Actual transition under ARRC-recommended fallback language is based upon the “Benchmark Replacement Date,” which is expected to be on or immediately after the following dates for USD LIBOR settings pursuant to the announcements: (i) December 31, 2021 for 1-week and 2-month USD LIBOR, and (ii) June 30, 2023 for Overnight, 1-month, 3-month, 6-month, and 12-month USD LIBOR.

For cash products other than loans to consumer borrowers, the ARRC’s recommended spread adjustment will match the value of ISDA’s spread adjustments to USD LIBOR which are now fixed as of 5 March, 2021. Given the special considerations due to consumer products and that the ARRC will include a 1-year transition period as part of its recommended spread adjustments for consumer products, the ARRC will further consider the most appropriate approach to the issue of methodology versus value for these specific products.

8 March 2021, ARRC

5. ISDA issued guidance on FCA LIBOR announcement and fallback spread adjustment for derivative contracts

The International Swaps and Derivatives Association (ISDA) has published a guidance for over-the-counter derivative transactions impacted by the FCA announcement on  the future cessation and loss of representativeness of the LIBOR benchmarks. As confirmed by ISDA, the FCA announcement constitutes an “index cessation event” under the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, thus fixing the fallback spread adjustment published by Bloomberg to the rate as of the date of the announcement for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings. Under the incorporation of the IBOR Fallbacks Supplement or adherence of the ISDA IBOR Fallbacks Protocol, the adjusted RFR plus spread will automatically occur for outstanding derivatives contracts after December 31, 2021 for outstanding derivatives based on all euro, sterling, Swiss franc and yen LIBOR settings, and after June 30, 2023 for outstanding derivatives based on all US dollar LIBOR settings.

KPMG’s perspective: The ISDA statement confirms the fixed fallback spread adjustment for outstanding derivatives contracts on and after 5 March, meaning that market participants could now use the fixed spread adjustments as a reference to confirm the pricing structure for actively transitioning facilities under the historical median approach. FIs are also encouraged to adhere to the ISDA IBOR Fallbacks Protocol as soon as possible if they have not already done so to ensure a proper transition for outstanding derivatives contracts.

5 March 2021, ISDA

6. Bloomberg issued technical notice on spread fixing event for all LIBOR tenors across all LIBOR currencies

Bloomberg confirmed the occurrence of the “Spread Adjustment Fixing Date” on 5 March 2021 for all LIBOR tenors across all LIBOR currencies subsequent to the ISDA announcement by issuing the list of each LIBOR tenor, ticker and associated fixed Spread Adjustment. Going forward, market participants should use the fixed Spread Adjustments as published when calculating fallback rates for each Rate Record Day from and including 5 March 2021, whereas all fallback rates calculated for a Rate Record Day prior to 5 March 2021 should refer to the Spread Adjustment previously published for such Rate Record Day.

KPMG’s perspective: Upon the Spread Adjustment Fixing Event, market participants should start to make appropriate adjustment and arrangements to the fallback rates by taking into account the fixed spread adjustment. Market participants should also refer to the Rule Book previously published by published jointly by ISDA and Bloomberg for more technical references and general rules regarding IBOR fallback rate adjustments.

5 March 2021, Bloomberg

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New Developments on Products and Pricing Strategy

1. Japan debuts swaptions linked to RFR

In recent weeks, yen interest rate swaptions that linked to the Tokyo Overnight Average Rate (TONAR) have started to trade in the market, which is marked as an important milestone in the adoption of alternative reference rate in swap market in Japan. However, experts remain cautious over the trade as it may result in a liquidity premium for pricing of swaption. Because of the inadequate liquidity of TONAR swaps, the hedging cost is likely to be high and market participants may expect that this liquidity cost could be charged on the swaption prices. Also, clearing houses’ plan to stop accepting yen LIBOR swaps may cause problems for swaptions that need to be cleared physically but cannot be cleared as specified in its contract.

Nevertheless, recent confirmation from UK Financial Conduct Authority (FCA) on the cessation date of yen LIBOR prompt the market to replace the current benchmark with TONAR in new contracts, including products like swaptions. Also, as the spreads between LIBOR and the risk-free rate (RFR) has been fixed, it is more convenient and less challenging for market participant to quote RFR swaptions.

KPMG’s perspective: It is expected that FCA’s announcement on 5 March could facilitate the transition from LIBOR to TONAR in the Japanese market for different products, including swaptions, as it has triggered the calculation of fallback spreads. However, as the problem with swaptions that should be cleared physically are still unsolved, FIs are encouraged to discuss the arrangement with counterparties at an early stage if possible. And with increasing TONAR swaps transactions in the market, we may also see an improvement in the market liquidity in the future.

26 March 2021, Risk.net

2. Linklaters advises on the proposed issuance of Asia’s first public SOFR Index FRNs

The Korea Development Bank propose to issue Asia’s first public Secured Overnight Financing Rate (SOFR) Index floating rate notes (FRNs) and Linklaters would act as US legal advisors of the underwriters of these notes, including BofA Securities, Citigroup, Credit Suisse, J.P. Morgan, KDB Asia and Mizuho Securities. And the proposed US dollar SOFR Index FRNs would be issued together with two other series of US dollar fixed-rate notes. The SOFR Index is proposed by the Federal Reserve Bank of New York in 2020 as the risk-free rate to replace US dollar LIBOR.

KPMG’s perspective: The proposed US dollar SOFR Index FRNs is an important milestone for the market development of SOFR in Asia as it marks the first FRN to be issued referencing SOFR as its proposed interest rate. It is expected that the volume of new SOFR-referenced FRNs product will start to grow in the Asia market in the next few months and more activities from regional banks might be observed. Banks are also suggested to pay close attention to the local market for upcoming new product issuance.

3 March 2021, Linklaters

3. SOFR adoption stalls after the delay in US LIBOR cessation date

The transition of derivatives market to the secured overnight financing rate (SOFR) has stalled as US dollar LIBOR is granted an 18-month reprieve by regulators of which five of the most heavily used US dollar LIBOR fixings will survive until mid-2023. Poor liquidity and the industry’s reliance on new fallback language has been a disadvantage to SOFR swaps. Data also showed that SOFR trading just represented 5.6% of total US dollar swaps by DV01 primarily due to the relatively higher trading price compared with LIBOR equivalents as well as liquidity concerns. According to research conducted by Internationale Nederlanden Groep, most of the clients still reach out to a LIBOR trade instead of a SOFR trade even though the trade is more attractive using SOFR, as clients are content to let legacy LIBOR contracts re-hitch to risk-free rate via new legal language rather than transfer their risk to SOFR before the official cessation.

KPMG’s perspective: The research shows that the global transition to SOFR is still lagging behind in process and one of the reasons would be the reliance on fallback. Continuous effort and collaboration from the industry bodies and leading market players are essential to increase investors’ confidence to accept SOFR as the key benchmark rate to replace LIBOR.

23 February 2021, Risk.net

4. BOT to issue the first THOR-linked floating rate bond in March 2021

The Bank of Thailand (BOT) will issue its first 6-month THOR-linked floating rate bond (FRB) in March 2021, which is an important milestone in promoting the use of THOR as a new reference rate for derivatives and cash products, as well as increasing the choice of interest rate hedging instruments in the financial market.

The first auction of the 6-month FRB with a coupon rate of 5 basis points above THOR will take place on March 25th with an issue size of THB 30 billion and the auction is part of the central bank’s 380 billion bond auction plan for March. In the coming months, the BOT plans to issue the FRB regularly and will consider raising issue sizes, increasing auction frequency, or adding new tenors as investors’ demand becomes stronger.

KPMG’s perspective: The issuance of Thailand’s first 6-month THOR-linked floating rate bond demonstrates further development in Asia in the new ARR-referenced bond market. As more FRB is going to be issued according to BOT’s plan, we may also see a boost in the liquidity of the THOR market as more THOR-linked FRB products are expected to launch in the market.

23 February 2021, BOT

5. Wall Street takes fresh steps to write $200 trillion Libor debt contracts by urging to prevent using LIBOR

Wall Street has taken more steps to cease using LIBOR to write $200 trillion debt contracts as SOFR-linked product issuance continues to increase in the US market with developments within the financial sector as well as other new industries recently. Energy company Enbridge Inc., which mainly operates in the U.S. and Canada, borrowed $500 million in the U.S. corporate bond market this week using SOFR as the reference rate. It is the first of its kind in the U.S. outside of the banking, housing and auto-finance sectors which have dominated the SOFR-linked borrowing market since the start of 2020. Other than that, U.S. housing finance giants Fannie Mae, Freddie Mac, as well as JPMorgan Chase & Co continue to be the leading issuers on the new ARR benchmark.

KPMG’s perspective: The new energy deal marks a new transition milestone in sectors other than banking, housing and auto-finance for SOFR-based issuance, and paves way for increased corporate borrowing based on the SOFR benchmark. Despite the cessation date for the USD LIBOR settings other than 1-week and 2-month tenors have been postponed as per the FCA announcement, it is expected that there will be a growing number of corporate borrowing using SOFR outside the financial sectors as encouraged by the regulators.

19 February 2021, MarketWatch

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Financial Risk Management
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