LIBOR: What happened and where are we going?

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1 LIBOR: What happened and where are we going? NEIL T. BLOOMFIELD ZACHARY J. KING ROBERT I. KENNY JAMES (JIM) A. BLAIR, III 1

2 What is LIBOR LIBOR submitters are asked the following question: At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am London time? Reported for a series of terms from overnight to 1 year. USD, EUR, GBP, JPY, CHF Based on professional judgment, not transactions 2

3 What is LIBOR used for? 250 LIBOR in Financial Instruments Amount in Billions Interest rate swaps Exchange-traded interest rate futures and options Forward rate agreements Syndicated loans Floating rate notes Data from the Financial Times on July 27,

4 Why Did People Lie? Improve trading performance Personal gain Avoid scrutiny during the financial crisis 4

5 Traders Behaving Badly Aggressive Traders We have another big fixing tom[orrow] and with the market move I was hoping we could set [certain] Libors as high as possible. cld you do me a favour would you mind moving you 6m libor up a bit today, i have a gigantic fix you're going to help me, promise me????? Receptive s Hi morning mate! Do you have any special requests for the libor? Done, for you big boy. if you aint cheating, you aint trying. 5

6 The Spider s Network Request for false rates Bank Trader False suggested rates Broker Tom Hayes Broker Broker Bank Trader 6

7 Avoiding a Self Fulfilling Prophecy LIBOR is a reflection of the submitter s cost of funds. High cost of funds in the financial crisis means financial difficulties. During the financial crisis Barclays management ordered the submitters to provide rates that were lower than its cost of funds to alleviate concerns about Barclays financial health. Barclays employees attempted to alert the BBA and FSA Guidance from BOE interpreted as an instruction to lie. 7

8 Settlements 8

9 LIBOR Replacement/Phase-Out Timeline August Wheatley Review - Chancellor of the Exchequer (UK). February G20 asks Financial Stability Board (FSB) (an international organization) to review. July IOSCO set forth a basic framework at request of FSB. July FSB made further recommendations. November Federal Reserve (US) convened the Alternative Rates Reference Committee (ARRC) to propose alternatives to LIBOR. Note that while the ARRC is a United States effort, other jurisdictions undertook similar reviews and reforms with some level of coordination. 9

10 LIBOR Replacement/Phase-Out Timeline Andrew Bailey statement of the FCA: FCA will not compel panel banks to make LIBOR submissions after end of Unclear when or if LIBOR will actually be phased out. Benchmark that exists side-by-side with LIBOR or wholly replace LIBOR? 10

11 Alternative Reference Rates Committee ARRC goals for alternative reference rates: Based on actual transactions Comply with the IOSCO Principles of Financial Benchmarks Adoption plan that will result in widespread use of ARRC benchmarks Account for the potential disappearance of LIBOR, which was not originally contemplated 11

12 Alternative Reference Rates Committee ARRC identified strongest potential replacements as: An overnight unsecured lending rate (OBFR) Some form of overnight Treasury GC repo rate ARRC recommended replacing LIBOR with SOFR (f/k/a BTFR) SOFR is an overnight Treasury GC repo rate or rates But SOFR is not published yet Federal Reserve published three rates for comment and consideration: Tri-party repo market General Collateral Financing (GCF) repo market Bilateral repo market 12

13 Issues with LIBOR Phase-Out Basis Risk the new rate and LIBOR will not be priced the same. Replacement rates may vary and administration could be difficult. Timing will the industry be able to pull off a uniform switch to a new rate? May lead to need for new credit agreement and swap documentation. If the replacement is SOFR, it depends on an overnight rate how to price longer tenors? 13

14 Practical Implications if LIBOR is Discontinued Potential Increase in Borrowing Costs Most credit agreements for syndicated credit facilities switch to using the Prime Rate with a reduced spread Difference as of October 30, 2017* One-Month LIBOR 1.24% Prime Rate 4.25% *Money Rates Section of The Wall Street Journal, October 30,

15 Practical Implications (Cont.) DISCONTINUANCE NOT ANTICIPATED Lending Example: Interest shall accrue on the outstanding principal balance of this Note at a variable rate of interest, adjusted monthly, equal to the LIBOR Rate (as hereinafter defined) plus 3.00% per annum (the "Interest Rate"). The LIBOR Rate" for the calculation of interest payable with any payment shall mean the one-month London Interbank Offered Rate (LIBOR) as published in the Wall Street Journal on the 1st day of the month preceding the applicable Payment Date (or, if The Wall Street Journal is not published that day, then on the next day on which The Wall Street Journal is published) 15

16 Practical Implications (Interest Rate Swaps) Swap Floating Rate Language: USD-LIBOR-BBA means that the rate for a Reset Date will be the rate for deposits in U.S. Dollars for a period of the Designated Maturity which appears on the Reuters Screen LIBOR01 Page as of 11:00 a.m., London time, on the day that is two London Banking Days preceding that Reset Date. If such rate does not appear on the Reuters Screen LIBOR01 Page, the rate for that Reset Date will be determined as if the parties had specified USD- LIBOR-Reference Banks as the applicable Floating Rate Option. 16

17 Lender and ISDA Response Lenders Updating Forms: Interest shall accrue on the outstanding principal balance of this Note at a variable rate of interest, adjusted monthly, equal to the LIBOR Rate (as hereinafter defined) plus 3.00% per annum (the "Interest Rate"). The LIBOR Rate" for the calculation of interest payable with any payment shall mean the one-month London Interbank Offered Rate (LIBOR) (or a comparable or successor rate which is selected by the Lender) as published in the Wall Street Journal on the 1st day of the month preceding the applicable Payment Date (or, if The Wall Street Journal is not published that day, then on the next day on which The Wall Street Journal is published) International Swaps and Derivatives Association (ISDA) working on fallback language for Swaps. 17

18 Borrower/End-User Concerns Replacement rate chosen by Lender could increase cost of borrowing. Swap might not fully hedge interest rate exposure. Suggestions: (1) Request reasonable or market standard for replacement rate; (2) Allow for prepayment of Loan if replacement rate is chosen; and/or (3) Request ability to terminate a swap upon prepayment of debt. 18

19 NEIL T. BLOOMFIELD Neil T. Bloomfield is a member of Moore & Van Allen s Litigation Team. He specializes in responding to government investigations, advising on regulatory requirements, and complex commercial litigation. Mr. Bloomfield regularly represents clients in inquiries by Federal (e.g. CFTC, DOJ, OCC, FRB, SEC, IRS, and various U.S. Attorney's offices), State (e.g. the North Carolina Attorney General and other state Attorneys General, and the North Carolina Department of Revenue) and international authorities (e.g. U.K. Financial Conduct Authority, European Commission, Monetary Authority of Singapore, and Hong Kong Monetary Authority). In addition to these inquiries, he regularly conducts internal investigations for matters ranging from compliance with internal policies to alleged violations of federal and state laws and regulations. Mr. Bloomfield takes a holistic approach to investigations starting with uncovering the issues and defending the company under investigation, but then moving past the immediate issues to enhance compliance policies and procedures and monitoring and testing to make sure that any issues that are identified are not repeated across the enterprise. Mr. Bloomfield also assists clients in responding to a variety of regulatory requirements including Comprehensive Capital Analysis and Review ( CCAR ) for ongoing regulatory investigations and potential legal exposure for events that may occur but have not yet impacted the company; Recovery and Resolution Planning and related training for boards of directors; Risk Data Aggregation and Reporting Requirements; and Sarbanes-Oxley whistleblower programs. As part of this practice, Mr. Bloomfield provides assistance in designing or enhancing programs to comply with applicable regulations, legal opinions on regulatory compliance, drafting policies to promote regulatory compliance, and preparing materials and training to promote internal initiatives and achieve regulatory compliance. 19

20 ROBERT I. KENNY Robert I. Kenny is a member of Moore & Van Allen PLLC and is part of the firm s Financial Services team. Mr. Kenny started the derivatives practice at MVA and is the firm s primary representative to the International Swaps and Derivatives Association (ISDA) of which MVA is an associate member. In addition to his derivatives work Mr. Kenny also represents lenders and borrowers in equipment finance transactions with respect to aircraft, rolling stock, and other assets and is named among Best Lawyers in America for Equipment Finance Law,

21 ZACHARY J. KING Zachary J. King is a counsel in the Financial Services Department of Moore & Van Allen PLLC. Mr. King s focus is on all manner of derivatives regulation and transactions. Mr. King has represented dealers, brokers, exchanges, asset managers, and end-users on several issues related to the Commodity Exchange Act and CFTC Regulations. Mr. King s broad experience in the derivatives space includes in-house representation, as well as time with the CFTC and the Washington, DC offices of WilmerHale. Highlights of Mr. King s experience include: Registration of swap execution facility and creation of related policies and procedures Negotiation of derivatives trading platform agreements Registration of swap dealer, multiple introducing brokers and multiple commodity trading advisors/commodity pool operators, and creation of related policies and procedures Advise end-users such as airlines and energy companies regarding potential litigation and enforcement actions in connection with position limits, market manipulation and trade practice violations Create document retention policies and procedures for CFTC registrants Advise clients on thresholds for swap dealer and major swap participant registration 21

22 JAMES (JIM) A. BLAIR, III James (Jim) A. Blair, III is the General Counsel of WCM Global Wealth, LLC. Jim, a native Texan, obtained his Bachelor of Arts (History) from the University of Texas at Austin in He then attended Dallas Theological Seminary in Dallas, Texas, and finished his post-graduate education in New York, obtaining his Juris Doctor Degree from the Syracuse University College of Law in After law school, Jim and his wife moved to South Carolina where he practiced business and commercial law before becoming General Counsel for WCM Global Wealth, LLC in Jim and his family live in Charleston, S.C. 22

Leveling the Playing Field What Will Happen to LIBOR - Q3 2017

Leveling the Playing Field What Will Happen to LIBOR - Q3 2017 The financial industry is trying to create a realistic alternative to LIBOR, but it will be challenging to switch seamlessly over to a newly