Drawing the line – Where are we now on USD LIBOR transition in the trade finance sector?

Jacqueline Cook, Of Counsel and Larissa Head, Trainee Solicitor, provide an update on the transition away from USD LIBOR with the deadline of 30 June 2023 upon us.

What do market participants in the trade finance industry need to be doing with the limited time left?

For some time now, parties in the trade finance sector have been aware that the use of USD LIBOR was coming to an end as the transition to use alternative Risk Free Reference Rates (RFRs) progresses using the Secured Financing Overnight Rate (SOFR) as the basis for RFRs for USD.

So, the deadline on 30 June 2023 for the end of USD LIBOR is well-known, anticipated and should, for the most part, already have been implemented. Lenders, borrowers and other players in the trade finance market need to be well-versed in the terminology used for RFRs, both for compounded in arrear RFRs and for Term RFRs. For USD transactions, participants should be aware of the workings of, and accessibility to, Term SOFR.

After 30 June 2023, banks and lenders will no longer be able to use USD LIBOR - all tenors of USD LIBOR will cease.

The Financial Conduct Authority (FCA) announced on 3 April 2023 that, in line with its November 2022 consultation, it requires LIBOR’s administrator, ICE Benchmark Administration Limited, to continue the publication of the 1-, 3- and 6-month USD LIBOR settings until 30 September 2024 on a synthetic basis (Synthetic USD LIBOR).

Here are some of the recent developments and considerations for the trade finance industry leading up to the 30 June 2023 deadline:

• Synthetic USD LIBOR. Market participants should continue to transition legacy USD LIBOR contracts and not rely on synthetic rates, which are a temporary bridging tool, according to the FCA.
• SOFR Adoption. The replacement rate for USD LIBOR is SOFR. Borrowers and lenders should have already identified any existing USD LIBOR referencing documentation which extends beyond Q2 2023. Participants operating in the trade finance industry should be using one of the family of SOFR rates for new and refinanced trade facilities going forward and taking into account that trade finance has been recognised as one area where term rates are needed. Term SOFR is available for use by market participants from two providers: CME Group Benchmark Administration Limited and ICE Benchmark Administration Limited, accessed by licence to the relevant portal.
• Loan Market Association (LMA). In May 2023, ahead of the cessation of USD LIBOR, the LMA updated its Term SOFR exposure drafts for investment grade and developing markets documentation, with guidance, into recommended form facility agreements with drafting for definitions and fallbacks.
• Alternative Reference Rates Committee of the Federal Reserve Bank of New York (ARRC). On 21 April 2023, the ARRC released guidance to market participants for Term SOFR best practice recommendations.[1] The ARRC urged market participants to complete their transition efforts[2] by asking them to negotiate appropriate terms in advance of 30 June 2023, if they have not already adopted ARRC-recommended hardwired fallback language.

Looking forward

With this crucial milestone almost reached in the transition away from IBORs, the focus now turns to EURIBOR and other IBORs, which will continue to be used in trade finance transactions.

Further information

For further information on the transition away from USD LIBOR, or any related trade finance issue, please don’t hesitate to get in touch with your usual contact at the firm.

For more about the firm’s Trade and Export Finance practice, click here, and for more Talking Trade Finance blogs, please follow this link.

[1] https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-Press-Release-Best-Practice-Recommendations.pdf and https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-Term-SOFR-Scope-of-Use-Best-Practice-Recommendations.pdf 
 

[2] DTCC’s LIBOR Replacement Index Communication Tool: https://libor.dtcc.com/#/dashboard; Federal Reserve Board published regulations which implements the LIBOR Act: https://www.federalregister.gov/documents/2023/01/26/2023-00213/regulations-implementing-the-adjustable-interest-rate-libor-act; and Legacy Playbook: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2022/LIBOR_Legacy_Playbook_PPT.pdf