MVA White Collar Defense, Investigations, and Regulatory Advice Blog

It may not be the next Taylor Swift song, but a prepayment changes the Lender-Borrower relationship. In a swap, we all know there are consequences. Rather than a “breakage cost”, the swap market just calls it an early termination payment. In loans, traditionally, there was less time/energy spent to negotiate the provisions requiring the borrower to indemnify a lender for breakage costs. Today, however, it is a hot topic. Specifically, in the context of SOFR-loan prepayments where the concept of “Breakage Costs” is a nebulous/unclear concept, leaving some market ...

On December 7, 2021, the Consumer Financial Protection Bureau (“CFPB”) published its final rule (“Rule”) facilitating the transition away from LIBOR for open-end and closed-end consumer financial products. The Rule amends provisions of Regulation Z, which implements the Truth in Lending Act to allow for the transition from U.S. dollar LIBOR to the Secured Overnight Financing Rate (“SOFR”) and other alternative reference rates. SOFR is deemed compliant as a replacement index whereas other alternative reference rates must pass the “comparability” or ...

This is an update to a previous post. This update highlights the formal endorsement of Term SOFR by the ARRC, expands the discussion to include Ameribor and dives more deeply into the issues associated with Term SOFR swaps resulting in a mismatch with any related hedge by the Lender.

The ARRC has endorsed (HERE) CME’s Term SOFR. One of the bigger pieces to this announcement and earlier related announcements (Scope of Use Cases), is that U.S. regulators will also permit Term SOFR Swaps, when one of the parties is an “end-user”. When looking only at the loan market, what new reference ...

Wednesday, the ARRC announced (HERE) the expectation to endorse CME’s Term SOFR in late July or early August. One of the bigger pieces to this announcement is the announcement that U.S. regulators will also permit Term SOFR Swaps, when one of the parties is an “end-user”. When looking only at the loan market, what new reference rate will be the most common? Term SOFR, BSBY or one of the other SOFR rates? A few thoughts below, but at this point I think Lenders need to begin considering how rate options will be discussed with Borrowers. We have worked with clients to develop guidance on ...

In a recent speech, the new SEC Chairman, Gary Gensler, came out questioning the use of BSBY as a replacement to LIBOR, by highlighting a number of “concerns” he has with BSBY and why SOFR is preferable.

HERE is the speech. The last half focuses on BSBY.

Gensler focused largely on the transaction data which underpins BSBY versus the transaction data which underpins SOFR. Here, SOFR has not only a clear advantage, but Gensler also notes weakness in BSBY in the 6- and 12-month tenors. However, there is an important difference between SOFR and BSBY that should have been noted by Gensler ...

In a press release (HERE) on June 8th, the Commodity Futures Trading Commission (the “CFTC”) published its first release in a series called the “SOFR First Transition Initiative” as a best practice. One goal for this sort of “best practice” is to impact the liquidity in LIBOR and SOFR swaps, thereby slowly (a) increasing the spread on LIBOR swaps and (b) tightening the spread on SOFR swaps. In other words, make LIBOR swaps more expensive and SOFR swaps less expensive. Even for non-dealers, this announcement is important as it is not only a major step in such non-dealers’ ...

Summary

Last Friday, the IBA published its Feedback Statement on Consultation on Potential Cessation.

The relevant dates regarding cessation are the same in the November request for comment – i.e., all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

• immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and,
• immediately after 30 June 2023, in the case of the remaining US dollar settings.

The transition away from LIBOR was born from the financial crisis.  For years regulators have been pushing for an alternative to the dominant market benchmark.  The underlying market was illiquid.  The rate was set by opinion, not transactions.  It was easily manipulated.  It was set by only the largest of financial institutions.  In the U.S., SOFR—the secured overnight funding rate—has been designated as the LIBOR replacement.  In many ways, it cures the ills of LIBOR.  The underlying market is liquid and the rate is set by actual transactions.  But in many ways it is wholly dissimilar to ...

By Neil Bloomfield. In another sign of progress, the Federal Deposit Insurance Corporation (FDIC) proposed easing a rule that requires banks to put cash aside to safeguard derivatives trades among affiliates. The proposal would remove the current requirement for members within the same bank group to post margins upfront when trading derivatives.  According to a 2018 survey conducted by the International Swaps and Derivatives Association (ISDA), the new rule could free up to $40 billion across some of the largest banks. FDIC Chairman Jelena McWilliams also stated that revoking the ...

On July 12, 2019, the U.S. Securities and Exchange Commission (SEC) joined the call to prepare for the transition away from LIBOR.  The staff of several Divisions of the SEC (the Divisions of Corporation Finance (DCF), Investment Management (DIM), and Trading and Markets (DTM)) and its Office of the Chief Accountant (OCA) issued a public statement regarding the impending transition away from using LIBOR as a benchmark and reference rate for commercial and financial contracts. Warning of the potential risks associated with the transition and the failure to prepare in advance, the SEC ...

 Noting that we are at “the start of the next critical stage in the transition away from LIBOR,” Federal Reserve Vice Chair for Supervision Randal K. Quarles delivered taped remarks at the June 3, 2019 Alternative Reference Rates Committee Roundtable, cohosted by the Alternative Reference Rates Committee and the New York University Stern School of Business and Salomon Center for the Study of Financial Institutions. Vice Chair Quarles reiterated warnings from regulators regarding the potential instability of LIBOR and stated that “[m]y key message to you today is that you ...

By Neil Bloomfield and Kristen Kenley  Double jeopardy prevents criminal defendants from being convicted of the same crime twice.  Res judicata prevents civil litigants from facing repeated claims by an overly aggressive plaintiff. Unfortunately, in the years after the financial crisis financial institutions were essentially unprotected from receiving multi-million dollar demands by multiple regulators for the same conduct.  The financial industry may soon experience a welcome shift from the Government’s burdensome and duplicative practice as policy changes at the ...

By Neil Bloomfield and Elena Mitchell.  The potential transition away from LIBOR has raised significant concerns in the financial markets, including whether LIBOR will end in 2021, what may replace it, what fallback language should be included in contracts in the interim, and how transition risks can be managed.  I was fortunate enough to participate in a recent panel entitled “LIBOR and the Potential Replacement Reference Rates: Where Do We Go from Here?” which was held at the University of North Carolina’s Banking Institute on Thursday, March 22, 2018.  The panel was moderated ...

Neil Bloomfield and Ed O’Keefe are coordinating a panel titled "LIBOR and the Potential Replacement Reference Rates: Where Do We Go from Here?" for the UNC Banking Institute on March 22 at the Ritz-Carlton in Charlotte, NC. Speakers on the panel include Ann Battle of the International Swaps and Derivatives Association, Inc., David Bloom of SunTrust Banks, Inc., Raymond Check of the Federal Reserve Bank of New York, Harriet Hunnable of the U.K. Financial Conduct Authority and Joaquin M. Sena of Bank of America.

The panel will discuss how the potential transition away from LIBOR has ...