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SFIG Releases Recommendations for LIBOR Benchmark Transition Best Practices
Practical Law Legal Update w-018-5098 (Approx. 4 pages)
SFIG Releases Recommendations for LIBOR Benchmark Transition Best Practices
by Practical Law Finance
| Published on 14 Jan 2019 • USA (National/Federal) |
The LIBOR task force of the Structured Finance Industry Group (SFIG) released a green paper setting out its members' initial views on how structured finance market participants may navigate the transition of newly issued LIBOR-based securities, including many asset-backed securities (ABS), to a replacement rate.
On December 14, 2018, the LIBOR Task Force of the Structured Finance Industry Group (SFIG) released a green paper entitled, A Set of Recommended Best Practices for LIBOR Benchmark Transition. The paper sets out SFIG members' initial views on how structured finance market participants may navigate the transition of newly issued LIBOR-based securities, including many asset-backed securities (ABS), to a replacement rate.
In the green paper, which is described as the first in a series of publications recommending LIBOR best practices, SFIG outlines recommendations on how to transition newly issued LIBOR-based ABS to a replacement rate. These include:
- Five events that would trigger the replacement of LIBOR as a security's benchmark rate, which are:
- public evidence that the administrator has ceased or will cease to provide the rate permanently and no successor will continue to provide the rate;
- public evidence that the regulator has acknowledged that the administrator has ceased or will cease to provide the rate (even if the administrator has not acknowledged this);
- failure to publish the rate for five consecutive business days when the failure is not the result of a temporary moratorium, embargo, or disruption;
- transition of more than 50% of the LIBOR-based assets in the securitization transaction to the replacement rate (only applicable to transactions with LIBOR-based securitized assets); or
- an indication by the applicable regulators that the benchmark is no longer representative or may no longer be used as a benchmark reference rate in new transactions.
- A fallback benchmark rate waterfall.
- Calculation methodologies for replacing reference rates. The green paper sets out replacement benchmark spread determinations that vary based on the clause of the replacement benchmark waterfall.
SFIG is also a co-chair of the Alternative Reference Rates Committee (ARRC) securitizations working group (SWG), which published its own consultation on USD LIBOR fallback contract language for public comment on December 7, 2018 (see Legal Update, ARRC Releases Consultations on LIBOR-Fallback Contract Language for Bilateral Business Loans and Securitizations). Since the ARRC SWG's consultation differs from the SFIG recommendations, SFIG published the green paper with its separate recommendations on best practices for the LIBOR transition.
Although neither the ARRC nor SFIG recommendations currently address the challenges related to benchmark transitions for legacy contracts, the SFIG has stated that future publications may consider the specific issues relating to legacy transactions that reference LIBOR.