Dear Mr. O’Malia and Ms. Battle,
SOFR Academy is an American education technology firm founded by a team of experienced Financial Services professionals. We utilize learning management software to deliver high-quality and low-cost online training courses dedicated to helping people transition away from the USD London Interbank Offered Rate (LIBOR). We believe that education is critical in order to achieve an orderly and broad-based transition to Alternative Reference Rates (ARR).
SOFR Academy is pleased to provide feedback in response to the International Swaps and Derivatives Association’s (ISDA) 2020 Pre-Cessation Fallback Consultation. We informally discussed preferences and responses with select clients, infrastructure providers and end users in forming our views on this consultation. We understand that by participating in this consultation, we are agreeing not to use this process for any anticompetitive purpose, and further agree and warrant that we will not engage in any conduct that would cause any other party participating in this consultation to be in violation of any competition or antitrust law or regulation.
SOFR Academy is of the view that ISDA should publish a Supplement to the 2006 ISDA Definitions so that the Rate Options for LIBOR in the relevant currencies (USD, GBP, CHF, JPY, EUR) all contain fallbacks that would apply upon the first to occur of (i) a permanent cessation trigger or (ii) a ‘non-representativeness’ pre-cessation trigger, and publish a Protocol to allow adherents to include the amended definitions (i.e., the definitions with the combined permanent cessation and pre-cessation fallback provisions) in all of their legacy contracts with other adherents.
SOFR Academy understands that in this scenario, the spread adjustment would be calculated as of the relevant announcement date regarding either ‘non-representativeness’ (i.e., the date that the UK FCA states that LIBOR ‘is no longer capable of being representative’) or ‘permanent cessation’, as applicable, but the fallback rates would not apply until the date on which that LIBOR is ‘non-representative’ (based on the statement by the UK FCA) or is discontinued, as applicable (if such date is different from the announcement date). SOFR Academy understands if an announcement that LIBOR ‘is no longer capable of being representative’ occurs prior to an announcement regarding ‘permanent cessation’ or the occurrence of permanent cessation, then the ‘non-representativeness’ spread would be the only spread applicable for derivatives that use the fallbacks in the standard ISDA Definitions and related Protocol (i.e., the spread for these derivatives would not subsequently be adjusted to account for a permanent cessation announcement or occurrence).
SOFR Academy notes the importance of seeking a wide range of responses for ISDA’s 2020 Pre-Cessation Fallback Consultation including from outside the largest banks and we note the defined success criteria associated with this current consultation. Take the example of a US regional bank who may not be regularly involved in ISDA’s work nor a significant participant in derivatives markets. Certain US regional banks use derivatives to match hedge the interest rate risk on cash products like loans, whereby they do not hold any residual interest rate risk. Market participants like US regional banks should, on an enterprise wide basis, invest the time and resources to understand the implications of the outcome of this consultation and take steps to mitigate any resultant potential interest rate basis risk. SOFR Academy encouraged responses to this consultation in our informal client conversations where possible however some respondents were undoubtedly hampered by the impact of the coronavirus (COVID-19) as businesses understandably diverted resources and management attention to business continuity related matters.
SOFR Academy notes that ISDA has already helped to forge industry consensus on a number of important LIBOR transition issues for the derivatives market. We applaud the significant amount of work that ISDA has performed to date in helping to facilitate a safe and orderly transition and we remain committed to supporting the work of ISDA going forward.
Respondent Firm Name: SOFR Academy LLC
Respondent Country: United States of America
Respondent Type: Education provider (Professional Services Firm)
Thank you for your consideration of these comments.
Members of the Management Board.