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.

It is starting to feel as if we are nearing the end of a long climb, in fact the end of a long period of uncertainty, for financial institutions and businesses alike, on how to deal with LIBOR transition. Having to keep an eye on regulators' statements, legislation, market developments and a large number of publications and webinars from trade bodies, takes quite an effort and indeed a considerable amount of time, not least when parties are also dealing with the economic fallout of the pandemic and trying to keep trade going. So, are we nearly there?

By Jacqueline Cook, Senior Knowledge Development Lawyer

Following much anticipation, the Alternative Reference Rate Committee (ARRC) has announced its official recommendation of the CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) term rates (SOFR Term Rates). Market participants should now have "all the tools"[1] needed to transition to US dollar (USD) SOFR.

Earlier this week, ARRC issued two press releases:

• publishing (a) conventions for SOFR Term Rates and (b) best practice recommendations for the use of SOFR Term Rates, and announcing the SOFR First Convention switch for USD linear swap trading;[2] and
• recommending CME Group SOFR Term Rates and publishing a factsheet on key steps and milestones for the LIBOR transition.[3]

ARRC’s announcement has been welcomed as "an important milestone for the industry and the continued development of the broader SOFR ecosystem."[4]

While we are waiting on the LMA's Working Sub-Group on Transition Issues in Syndicated Loan Markets to produce draft provisions dealing with the transition to SONIA, their US counterpart, the Alternative Reference Rates Committee (ARRC) has already done so for SOFR, the US dollar risk free rate (RFR), in its recent consultation paper "Regarding More Robust LIBOR Fallback Contract Language for New Originations of LIBOR Syndicated Business Loans".

The ARRC's approach is likely to be influential for the LMA in relation to transitional drafting for USD (and potentially for other currencies as well in the interests of consistency). The highlights of the ARRC consultation paper include: