LIBOR: The Final Countdown? - Capital Markets Services - FTI Consulting

ARTICLE

LIBOR: The Final Countdown?
Capital Markets Services

January 2021

An overview of the numerous challenges for the industry ahead of the LIBOR transition.

In many respects, the LIBOR transition can be seen as an
escape from past mistakes into what the industry hopes
 An introduction to Benchmarking
might be a brighter future. As economists and financial Financial market participants rely on specific benchmarks
markets experts, we propose a technical overview of as reference points to target performance or replicate a
the challenges ahead and emphasize the importance risk and return level. However, benchmarks are imperfect
of history when transitioning towards a more reliable in nature and may not always be reliable as a proxy. The
interbank rates benchmarking environment. Benchmarks extent to which a benchmark is fully representative of the
are by their very nature imperfect substitutes to real financial market it is designed to track depends on the
markets and therefore hard (if not impossible) to fix. robustness of the methodology used to define, govern,
Practitioners willing to rely on such benchmarks should compute and publish it. Therefore, the risks associated
carefully consider such imperfections and the extent with the representativeness of benchmarks should
to which a benchmark can become a liability before be understood by potential users before relying on a
deciding to rely on it. Although solving LIBOR is a complex benchmark. In this section, we discuss some of the general
undertaking and solving complex situations requires features and risks associated with benchmarks, which
compromises, some market participants are not in favour might be relevant to LIBOR.
of a clean-cut farewell to the LIBOR index by the end of
 Transparency
2021 and worry about potential disruption to the market.
This sentiment is partly driven by the fact that the fallback The definition, methodology, policies, data and sources
provisions introduce a new economic value transfer relied upon by the benchmark administrator, and the roles
problem in a post-LIBOR world that is impossible to solve of the various service providers involved in the process
without the continuation of LIBOR in some way after 2021. of governing and producing the benchmark, should be
 clearly documented and made available to users. Lack
 of transparency may mislead users’ understanding of
 the purpose and scope of the benchmark and hinder its
 representativeness or usefulness to the market.

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Representativeness Representativeness is a major challenge, even in major and
 liquid markets such as money markets for major currencies.
Benchmarks are usually expected to represent a particular
universe of transactions or financial instruments. However, Liquidity
depending on the benchmark methodology, certain criteria
 Liquidity varies across financial instruments, geographies,
or computation methods may alter the benchmark level
 markets and economic cycles. In an illiquid market, the
in an unexpected way. In order to be representative, a
 transactions used to compute a benchmark may not be a
benchmark methodology should be pro-actively updated
 good indicator of the fair market value at which a financial
to keep track of market developments and regulations.
 instrument may be traded. This was certainly one of the
We describe below four biases that can affect the
 major issues regarding money markets, specifically LIBOR, in
representativeness of a benchmark:
 the wake of the global financial crisis as banks contributing
Sample selection bias: It occurs when the benchmark to LIBOR were reluctant to lend to each other on an
administrator decides to only include reference unsecured basis with a term interest rate payment. Where
transactions or members from a specific market based on variance in transactional data is large (due for example to
certain criteria, minimum transaction size, counterparties illiquidity), and specific prevailing market and idiosyncratic
involved, the currency and geography, the maturity etc. circumstances regarding such transactional data point are
Survivorship bias: it occurs when a particular source may not looked into and adjusted for comparability purpose,
be excluded from a benchmark because the source merges then transactions may be wrongly excluded from, or
with another source or ceases to exist. This may affect the included in, a benchmark computation. A good example is
level of the benchmark, but in some instances, the data is where transactions are restructured, and the pricing of the
adjusted for survivorship bias. newly executed transaction appears off-market. In such
 case, a sensible adjustment would involve disentangling
Backfill bias: this occurs when the history of the published
 the effect of the restructuring so that the components of
benchmark is updated after the inclusion of a new source or
 the datapoint can be understood properly before deciding
the exclusion of an existing source. The backfilled data for a
 whether to include or exclude it from the benchmark.
new fund added to an index may be biased, for example, if
the fund was added to a benchmark after a period of good Integrity
performance. Once the data is backfilled, it makes it hard to
 There are many examples of benchmarks that relied upon
rectify because removing the backfilled data will then lead
 corrupted sources of information. In the past, markets for
to deviation from the benchmark.
 interbank lending (the LIBOR market), foreign exchanges,
Expert judgement/discretion vs. objective measures: precious metals, SSA (sub-sovereign, supranational and
data can be cleaned for outliers or errors using objective agencies) bonds, commodities, various securities and
techniques (such as trimming the data for outliers) and derivatives have been subject to numerous allegations and
sources can be aggregated in fairly objective formulas investigations of manipulative attempts, misreporting/
(for example using size-weighted and/or time-weighted misrepresentation, collusive behaviours, spoofing,
averages or medians of observed transactions). Where pump and dump, and insider trading. Such allegations
the methodology for identifying outliers or aggregating of wrongdoing raise questions about the integrity of
or weighting the data cannot be automated using an benchmarks.
objective technique or measure, expert judgement may
be considered as one input to ensure that the published Continuity
benchmark reflects the market sentiment at the time of Continuity of a benchmark is key, particularly when the
publication. Expert judgement may also be exercised at documentation governing particular arrangements relying
the source level, this is the case when banks contribute on such benchmark do not contemplate discontinuation
indicative quotations for example or, in the context of clauses and fall-back provisions. In absence of industry
LIBOR, when contributed information is not based on actual guidance from regulators, the discontinuation of certain
transactions. Expert judgement is subjective and, as a result, benchmarks could cause substantial market disruption
introduces a degree of discretion from the source and/or the and result in unintended consequences for users. This
benchmark’s administrator, which should be considered as paper focuses on this particular aspect of benchmarking in
a potential risk for those relying on such benchmark. the context of LIBOR discontinuation.

LIBOR: The Final Count Down? FTI Consulting, Inc. 03

Errors Initially, in the absence of observable transactions data,
 the BBA produced LIBOR by asking the banks to answer
Errors can result from operational issues that delay their
 the question:
publication or human errors that result in erroneous
benchmark computation. Statistically speaking, errors are “At what rate do you think inter-bank term deposits
unavoidable, but benchmarks should seek to minimise will be offered by one prime bank to another prime
errors and address the cause so that the same errors do bank for a reasonable market size today at 11a.m.?”
not keep occurring. From 1998 onward BBA changed the LIBOR definition to:
Stability “The rate at which an individual Contributor Panel
The benchmark methodology should not materially Bank could borrow funds, were it to do so by asking
affect the level and volatility such that the benchmark for and then accepting inter-bank offers in reasonable
consistently reflects the prevailing market circumstances market size just prior to 11:00a.m. London time”.
at the time of its publication. Submissions were processed by Thomson Reuters acting
Benchmarking is not a simple undertaking and will never as calculation agent, which calculated the composite
be a perfect tool. Users have to assess the extent to which benchmarks according to guidelines provided by the
relying on a benchmark is valuable, but assessing the Foreign Exchange and Money Markets Committee. The
limitations of a benchmark requires market and industry final published rate was calculated as the interquartile
knowledge. The following sections focus on LIBOR as a mean of the quotes collected. The top 25% and bottom
benchmark, in the context of its proposed discontinuation. 25% of the banks’ submissions were removed and
 an arithmetic average was then calculated using the
General context of LIBOR and remaining quotes. The fixings were then published by

the transition Thomson Reuters after 11.00a.m. London time.
 LIBOR is still published for the five major currencies USD,
It is well known that past performance is not a good
 GBP, EUR, JPY, CHF and was discontinued in 2013 for AUD,
indicator of future results. However, past experiences
 CAD, DKK, NZD and SEK.
influence decisions for the future. In that sense, historical
results should be considered, but not determining factors
when considering alternatives to the London Interbank Focus on the transition of discontinued LIBORs
Offered Rate (“LIBOR”). in 2013
 In March 2013, the International Swaps and
A select history of the LIBOR BBA
 Derivatives Association (“ISDA”) issued a guidance
LIBOR was introduced as a contractually defined term to note stating that counterparties will need to bilaterally
facilitate loan transactions in the 1970s. The development agree how to deal with transactions that reference
of LIBOR was driven by growth in new financial instruments LIBOR rates for discontinued currencies if they wish
and market requirements for standardised interest rate to alter fallback determinations already provided
benchmarks, measuring the real rate at which banks could in their Confirmation or the 2006 ISDA Definitions.
 1

borrow money from each other on an unsecured basis and ISDA provided two non-binding approaches that ISDA
paying interest at maturity (term borrowing). members had discussed: (1) agree to use a substitute
In the 1980’s, a standardised rate was developed and was rate in lieu of the discontinued rate; or (2) terminate
administered by the British Bankers’ Association (“BBA”) affected trades. By way of example, Australia has
through BBA LIBOR Limited. This became increasingly used the bank bill swap rates (BBSW) since the 1980s.
important as London’s status grew as an international As of 2018, the BBSW was estimated to have been
financial centre. referenced in derivative contracts worth AUD 17 trillion
 2
 and business loans worth AUD 300 billion. Following
In 1984, UK banks asked the BBA to develop a calculation
 the decision to discontinue AUD LIBOR, the Australian
for use as an impartial basis for calculating interest on
 Tax Office (ATO) and the Australian Financial Markets
syndicated loans. This led to the creation of the BBA
 Association (AFMA) proposed to use BBSW as a proxy
Interest Rate Settlement in 1985, which became BBA
 rate for AUD LIBOR.
LIBOR in 1986.

LIBOR: The Final Count Down? FTI Consulting, Inc. 04

Originally, 15 maturities were published for LIBOR and, in
recognition of the lack of liquidity in some maturities, 7 Focus on the Findings of the investigations that
are published today. The number of panel banks making resulted in a strong push for a LIBOR reform.
up each currency panel and the types of instruments to be Definition: LIBOR was initially created to be a gauge
included as relevant transactions to assess the LIBOR rate of unsecured funding for banks which was, to a very
has changed over the years. great extent, driven by interbank activity prior to
LIBOR is referenced in a number of transactions such as the GFC. The activity in that market had decreased
syndicated loans, business and retail loans (mortgages, markedly and wholesale deposits negotiated with
credit cards, auto, consumer, student), floating rate other counterparties than banks were playing an
notes, securitisation (RMBS, CMBS, CLOs, ABS, CDOs), increasingly important role in banks’ funding.
deposits and over the counter and exchange traded Methodology: LIBOR submissions were based on
derivatives (largely interest rate derivatives). Often expert judgement, as opposed to transactional data.
overlooked, LIBOR is also used as an input for valuation
 Framework for submissions: the submission process
purposes (although is has become less common recently)
 was at that time largely unsupervised and conflicts
to forward and discount cash-flows, for performance
 of interest were not addressed. For example, in some
measurement (for example as a hurdle for hedge funds’
 investigations it was found that money markets
incentive fees) and to calculate penalties for delays on
 traders had contributed to the LIBOR submission
payment of invoices or to compute interests on damages
 process despite an obvious conflict of interest.
in the context of disputes.
In addition, LIBOR was considered as one of the most Misconduct: inappropriate collusive influence on
important macro-economic indicators and was used submissions and communications between traders at
globally as a gauge of market expectation regarding different banks hindered the integrity of LIBOR as a
central bank interest rates, liquidity premiums in the benchmark.
money markets and the health of the banking system. Unregulated: submission to LIBOR fell outside the
In the wake of the Global Financial Crisis in 2007-08 regulatory perimeter.
(“GFC”), central banks such as the Bank of England Errors: the lack of proper audit and controls of the
(“BOE”) and the US Federal Reserve System (“FRS”) submissions and calculation of the trimmed average
started to be informed of industry concerns that the led to errors in the calculation of LIBOR.
LIBOR rate was being under-reported. Banks had little
appetite to lend to other banks at 3 months term on A select history of ICE LIBOR
an unsecured basis and had preference for overnight
 In September 2012, the Wheatley Review of LIBOR set
secured lending. Allegedly, banks were not posting
 out a ten-point plan for its reform which came into force
representative LIBOR rates to avoid drawing attention to
 on 1 April 2013. In January 2014, the ICE Benchmark
a potential increase in their credit risk. Therefore, LIBOR
 Administration (“IBA”) took over from BBA for publishing
no longer represented the rate at which banks were
 LIBOR and changed its name to ICE LIBOR, but it continues
willing to lend to each other.
 to be commonly known as LIBOR. The IBA proposes
In addition, after allegations that LIBOR was also rigged a new methodology to address the issues with LIBOR
in a collusive fashion, antitrust investigations on LIBOR contributions (the “Waterfall Methodology”).
started around the world involving regulators such as the
 IBA changed the definition of LIBOR as:
US Securities and Exchange Commission, the Department
of Justice, the Financial Conduct Authority (“FCA”) and the “A wholesale funding rate anchored in LIBOR panel
European Commission. These investigations highlighted banks’ unsecured wholesale transactions to the
structural failings in LIBOR. The failings have led to greatest extent possible, with a waterfall to enable a
significant fines globally (over USD 9 billion in total) since rate to be published in all market circumstances”
2012 on a number of the panel banks for inappropriate
conduct with regard to LIBOR.

LIBOR: The Final Count Down? FTI Consulting, Inc. 05

 This brief summary of the LIBOR transition does not
 Focus on the ICE LIBOR Waterfall Methodology
 3
 include full details of the LIBOR reform implemented by
 ICE LIBOR is currently computed as the arithmetic the IBA, which in many respects sought to address all the
 average of the banks’ contributions excluding the limitations of the BBA LIBOR. Despite all the incumbent
 upper and lower quartiles to remove outliers and issues related to LIBOR as a benchmark, LIBOR was not an
 rounded to five decimal places. Banks contributions unsuccessful standardisation undertaking.
 are based on the Waterfall Methodology which
 FIGURE 1: HISTORICAL OTC DERIVATIVES NOTIONAL OUTSTANDING (USD
 involves three levels of contribution, namely: TRILLIONS)
 Level 1 - Transactions: a volume-weighted average 800
 price of the bank’s eligible transactions with a higher 700
 weighting for transactions booked closer to 11a.m. 600
 London Time.
 500
 Level 2 - Transactions derived: transactions derived
 400
 data including time-weighted historical eligible
 300
 transactions adjusted for market movements and
 200
 linear interpolation.
 100
 Level 3 - Expert Judgement: market and transaction
 data-based expert judgement, using the bank’s own -
 1998
 1999
 2000
 2001
 2002
 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019
 2020
 internally approved procedure (based on a set of pre-
 determined inputs agreed and with IBA). Equity Interest rate Foreign exchange
 Other Credit Commodities

 Source: BIS
As IBA was undertaking the first reform of LIBOR, the end
of LIBOR was announced in July 2017 during a speech by How will the industry transit out of LIBOR?
the FCA CEO Andrew Bailey on “the Future of LIBOR” in
 Most of the contracts referencing LIBOR did not envisage a
combination with panel banks’ support to sustain LIBOR
 permanent cessation of LIBOR. Existing fallback language
until the end of 2021 and seek a replacement.
 in these cases may not be appropriate for a number of
On 1 April 2019, the IBA announced that it had completed reasons. The existing fallback language may corrupt
the transition of all LIBOR panel banks to the Waterfall the intent of the transaction, lead to a substitute rate
Methodology. The spirit of the Waterfall Methodology was 6
 significantly higher (or lower), or leave stakeholders in
to (i) anchor LIBOR to the greatest extent possible in actual limbo regarding calculation of future payments (or receipts).
transactions, (ii) reflect changes in banks’ funding models In this context, contracts referencing LIBOR need to have
and (iii) ensure that panel banks always make a submit their fallback language amended to limit disruption.
regardless of activity levels on a particular day.
 Proposed fallback language in cash and derivatives
The outstanding LIBOR notional in the five major currencies markets
is estimated at approximately USD 240 trillion as of December
 Under the impulse of the regulators and market
2017, a substantial portion of which is over the counter
 4 participants, working groups were created to facilitate
(“OTC”) interest rate derivatives. OTC interest rate derivatives
 the transition to a post-LIBOR world. Besides identifying
represent the bulk of OTC derivatives traded globally (see
 an alternative reference rate to LIBOR called the Risk-Free
Figure 1). This estimated value excludes other interbank
 Rates (“RFRs”), such as Secured Overnight Financing Rate
benchmarks such as the Euro Interbank Offered Rate
 5 (“SOFR”), Sterling Overnight Index Average (“SONIA”),
(“Euribor”), which differs from LIBOR in some respects. The
 Euro Short Term Rate (“€STER”), Swiss Average Rate
substantial size of the outstanding LIBOR notional suggests
 Overnight (“SARON”) and Tokyo Overnight Average Rate
that, despite the various debates about the integrity of
 (“TONA”), working groups and their members are guiding
LIBOR over the years, and the various changes to LIBOR in
 the market towards recommended fallback languages.
recognition of its deficiencies, LIBOR has been commonly
used by the industry and contributed to a significant number In respect of derivative products linked to the interbank
of transactions at the service of the global economy. offered rates (“IBORs”), on 23 October 2020, ISDA launched

LIBOR: The Final Count Down? FTI Consulting, Inc. 06

the IBOR Fallbacks Supplement and IBOR Fallbacks a waterfall for the RFR and the spread components. The
Protocol. The supplement will amend the 2006 ISDA waterfall is different depending on the cash product.
Definitions for interest rate derivatives to incorporate robust — For adjustable rate mortgages, the replacement
fallbacks for derivatives linked to certain IBORs, with the benchmark will be the one recommended by the
 7
changes coming into effect on 25 January 2021. From Board of Governors of the FRS, the Federal Reserve
that date, all new cleared and non-cleared derivatives that Bank of New York, or a committee endorsed or
reference the definitions will include the fallbacks. convened by the Board of Governors of the FRS or the
The IBOR Fallbacks Protocol will enable market Federal Reserve Bank of New York. If not available,
participants to incorporate the revisions into their legacy the rate will be determined by the note holder. ARCC
non-cleared derivatives trades with other counterparties recommends that the spread adjustment match the
that choose to adhere to the protocol. ISDA bases its IBOR ISDA Fallback Spread if the replacement benchmark
 10
fallbacks on an adjusted version of RFRs to account for the is SOFR.
difference between IBORs and RFRs. — For FRNs, the replacement benchmark will be a
The ISDA fallback rate for a LIBOR tenor is the sum of: term SOFR. If term SOFR is not available, then a
— a term adjusted RFR, which is the RFR compounded compounded SOFR will be used. If compounded SOFR
 daily over a period equivalent to the LIBOR tenor being is not available, the replacement benchmark will be
 replaced (“Compounded RFR”); and, the one recommended by the Board of Governors of
 the FRS, the Federal Reserve Bank of New York, or a
— a spread adjustment, which is the median of the committee officially endorsed or convened by the Board
 differences between the LIBOR and the Compounded of Governors of the FRS and/or the Federal Reserve
 RFR for the corresponding LIBOR tenor calculated over Bank of New York or any successor thereto. If such an
 a static lookback period of five years prior to the date alternative is not available, the ISDA fallback rate will be
 where LIBOR ceases to be published or is considered used. If the ISDA fallback rate is not available, the rate
 non-representative by the regulator (“ISDA Fallback selected by the issuer or its designee will be used. ARRC
 Spread”). recommends that the spread adjustment for FRNs would
As an illustrative and simplified example, considering (i) match the ISDA Fallback Spread, or (ii) be determined
31 December 2021 to be the last date of LIBOR publication by the issuer or its designee, if the benchmark rate is
of a representative LIBOR (the “Cessation Date”), the ISDA
 11
 itself selected by the issuer or its designee.
fallback rate replacing 3-month USD LIBOR as at 1 March The recommendations from ISDA and ARCC are well-
2022 will be equal to the sum of: regarded, with 257 derivatives market participants already
the daily compounded SOFR over the period between adhering to the ISDA Fallbacks Protocol during the two-
1 March 2022 and 1 June 2022; and, the median of the week pre-launch ‘escrow period’ and the BOE publishing
differences between the 3-month USD LIBOR and the a press release announcing its signature on 23 October
compounded SOFR (over 3 months) over the period from
 12
 2020. However, the work is still left to the parties to agree
30 September 2016 to 30 September 2021 (i.e., 3 months on which language to choose on a bilateral basis.
 8
prior to the Cessation Date to match the LIBOR tenor). As a result of the slight divergence between ARRC
In respect of USD cash products, the Alternative Reference waterfall approach and the ISDA fallback rate, there
Rates Committee (“ARRC”) published “Guiding Principles could be a misalignment in fallbacks between derivatives
for More Robust LIBOR Fallback Contract Language and cash instruments, which could result in ineffective
in Cash Products” in July 2018, followed by several hedging and basis risk. In anticipation, ISDA and ARCC
consultations. The work done by ARRC resulted on have also provided recommendations and templates
recommended languages for adjustable-rate mortgages, to facilitate complex cases that necessitate bilateral
bilateral business loans, floating rate notes (“FRNs”),
 13
 negotiations. For example, ISDA recommends amending
securitizations, syndicated loans and variable rate private the fallback language of an FRN to match the one of its
 9
student loans. derivative hedge to minimize hedging mismatches and
ARRC’s recommendations for the fallback language are this recommendation does not go against the ARCC
 14

structurally similar to ISDA’s recommendations but embed guidelines.

LIBOR: The Final Count Down? FTI Consulting, Inc. 07

Asset managers and the LIBOR transition legal and operational dimensions of the LIBOR transition
 and how these impact various stakeholders as well as
Whilst ISDA and ARRC, and the UK Working Group on
 existing and prospective investors.
Sterling Risk-Free Reference Rates have made steps to
define fallback language, there is no universal language. Structural, legal, accounting and operational
As a result, some specific products and industries fall changes for financial institutions
outside the scope of the standardised propositions for
 Banks face a multi-faceted challenge in respect to
fallback frameworks.
 the benchmark transition and are likely to encounter
For instance, certain legacy FRNs will be very difficult, if numerous issues with managing legacy products,
not impossible, to amend. This is due to the consent rights introducing new products, and collaborating with
of impacted parties, as referenced in the terms, requiring market participants and stakeholders to enable a smooth
100% noteholder consent for amendments. Propositions transition.
have been made to further empower benchmark regulators
 From an operations perspective, a number of issues
with the ability to override contracts and limit the possible
 15 can arise to disrupt an orderly transition, precipitating
disruption emerging from failures to amend the terms.
 the need for an adequate allocation of resources for the
There is no standard fallback provision for hedge funds transition. A major risk is insufficient human and data
and asset managers relying on IBORs for benchmarking management resource capacity to carry out the transition.
investment strategies or as a reference hurdle to monitor There might be significant costs associated with procuring
and value carried interest and incentive fees. additional resources encompassing trading, back-office IT
For some specialized investment funds, whose returns tools, compliance and calculation models factoring in new
rely partly on using debt to leverage investors’ equity, interest rate curves. Similarly, the lack of internal training
such as sophisticated structured credit or distressed debt and the associated costs of additional training in the
investors, the transition from LIBOR to fallback terms may aforementioned factors can disrupt the transition.
result in mismatches between assets and liabilities. The A number of risks related to legal and compliance
higher the leverage the more such basis risk could impact procedures may manifest themselves during the transition
(positively or negatively) investors’ returns and ultimately process. For instance, inadequate and inconsistent
the fund managers’ incentives. definition of targeted fallback language and roll-out
For fund managers, whose performance is linked to LIBOR, procedures may lead to disputes and litigation. It may
substituting LIBOR to one of the fallback propositions be harder to resolve such disputes due to deficiencies in
from ISDA or ARRC may impact the hurdle rate (positively assessing the basis for legal cases and understanding the
or negatively) and therefore the net performance to potential implications of fallbacks after LIBOR cessation.
investors. Banks will need to manage the emergence of new basis
Following the European Securities and Markets Authority risks altering the funding and therefore engineering
(“ESMA”) guidance on performance fees, asset managers of structured products, the nature and composition of
may want to choose carefully their new benchmark to the hedging strategy, the composition of the trading
align it with the fund’s investment objectives, strategy books, and adding complexities to the asset-liability
and policy. As ESMA states “it should not be deemed management process. The management of basis risk will
appropriate for a fund with a predominantly long equity- be compounded by limited historical parameters relating
focused strategy to calculate the performance fee with to liquidity and volatility of the RFRs.
 16
reference to a money market index”.
 Analysis of the fallback
Consistent with other regulators, the FCA, in its “Dear
CEO” letter to UK asset managers dated 27 February 2020, proposition
stated that firms exposed to LIBOR without a plan in place The main challenge in the LIBOR transition resides in
should act urgently to avoid market disruption or harm the discontinuation of LIBOR itself and the absence of
to consumers, emphasizing that asset managers had a a perfect substitute to LIBOR. Although the RFRs are
 17
responsibility to ensure a smooth LIBOR transition. considered to be more reliable indicators because they
Therefore, asset managers will need to conduct detailed are linked to transactions, RFRs remain fundamentally
due diligence on the various economic, reglementary, different from LIBOR.

LIBOR: The Final Count Down? FTI Consulting, Inc. 08

Differences between RFRs and LIBOR Moreover, LIBOR is rounded to five decimal points, where
 SOFR is rounded to the nearest basis point, SONIA is
Contrary to LIBOR, which is a term rate, RFRs are all
 rounded to four decimal places, €STR and TONA to three
overnight rates. Therefore, also contrary to LIBOR, the
 decimal places.
payment on transactions referencing RFRs is not known
in advance since they fix and compound daily through the Finally, not all RFRs have been published for as long as
corresponding equivalent LIBOR term. In some respects, LIBOR. Although SONIA has been published since 1997,
this positions RFRs as a counterintuitive substitute to LIBOR SOFR only started to be published from April 2018 and
since LIBOR is known at the time of fixing for a given period, was backdated to April 2014. €STER started on October
and RFRs are only known at the end of such period. 2019. SARON has been published since August 2009 (and
 was backdated to June 1999). The lack of comparability
We note that the backward-looking characteristic of the
 between LIBOR and RFRs during periods of high market
RFRs is a main issue for the options market, as it changes
 stress for financial institutions, such as the GFC, leaves
materially the nature of the option contract and thus the
 uncertainty as to the reliability of the median spread
hedge it can provide. More generally, the creation of a
 approach used for ISDA Fallback Spread.
forward-looking term rate indexed on RFRs is a necessity
to limit disruption in the market. Aware of this issue, ARCC As RFRs and LIBOR are fundamentally different
released Request for Proposals for the Publication of benchmarks, the spread between them on a given date
Forward-Looking SOFR Term Rates on 10 September 2020.
 18
 is never constant. The relationship between LIBOR and
 RFRs is not always necessarily obvious and both markets
LIBOR is an unsecured term lending rate, whereas RFRs
 may respond differently to the same market events.
such as SOFR or SARON involve secured overnight lending.
 Owing to this complex relationship and the non-constant
SONIA, €STER and TONA are unsecured overnight lending
 spread, the spread between LIBOR and RFRs is difficult
rates. Therefore, RFRs are not economic equivalents to
 to predict or measure in absence of one of the two
LIBOR. As risk-free overnight (secured or unsecured)
 benchmarks.
rates, RFRs are typically lower than LIBOR, which includes
elements of credit risk and term and liquidity premiums. As a result, there will be a value transfer if LIBOR is
 discontinued and the spread between LIBOR and RFRs
The transactional data, timing and averaging method to
 is fixed on the last observation date of LIBOR. But, in
compute LIBOR differs from the RFRs.
 absence of LIBOR, it will be impossible to determine
— Transactional data: depending on the waterfall level whether the spread fixed in the fallback language
 retained by each contributing bank for the computation of a particular agreement is lower or higher than
 of LIBOR, the trimmed average produced by IBA is not what it would have been in a world where LIBOR is
 comparable to the methodology used to compute not discontinued. Therefore, it will be impossible to
 RFRs, which are essentially based on transactions. For determine who wins and who loses in absence of LIBOR.
 instance, tri-party repo transactions are not eligible for
 LIBOR, but they are eligible for SOFR. Analysis of the reliability of the ISDA Fallback Spread
— Timing: LIBOR may be based on same day data (up to As mentioned previously, the ISDA Fallback Spread will be
 11a.m. London time for level 1 contributions, but it may fixed as the median of the observed spread over a 5-year
 not only rely on same day transactions for level 2 and period at the Cessation Date. In this section, we assess the
 3; and it is published at 11:55am London time. Some reliability of the median of the observed spread between
 RFRs rely on the previous day transactions such as LIBOR and its corresponding Compounded RFR over 5
 €STR (which is published at 8a.m. CET the next day) and years, as a meaningful substitute for the basis risk between
 SONIA (which is published at 9a.m. London time the LIBOR and RFR after LIBOR cessation. We focus on SONIA
 next day). as it is available over a longer period than other RFRs.

— Averaging method: While LIBOR is based on a trimmed We look at the historical spreads between 3-month GBP
 arithmetic average of level 1, level 2 and/or level 3 banks’ LIBOR and its corresponding Compounded RFR, i.e. SONIA
 contributions, SOFR is based on a volume-weighted compounded over the same interest calculation period
 median of transactions, SONIA and €STR on a of 3 months. This spread is shown in Figure 2. We can
 volume-weighted trimmed average of transactions and observe that the spread was very volatile during the GFC
 SARON on a volume-weighted average of transactions. but stabilised afterwards.

LIBOR: The Final Count Down? FTI Consulting, Inc. 09

FIGURE 2: HISTORICAL DAILY DIFFERENCE BETWEEN 3-MONTH GBP LIBOR incorporates an element of hindsight in the computation
AND THE CORRESPONDING COMPOUNDED RFR VERSUS THE ISDA FALLBACK
SPREAD (IN BASIS POINTS)
 of the Compounded RFRs. We explore in the following
 400 paragraphs the implications of this hindsight element built
 350 into the ISDA Fallback Spread.
 300 A trader looking to replace 3-month GBP LIBOR with
 250 SONIA is faced with the dilemma that the effective
 200 SONIA rate is not known in advance. One reference point
 150
 available to traders reflecting the expected SONIA over
 100
 a period of time is the SONIA swap curve. In the context
 50
 of LIBOR transition, one should be interested in the
 0
 spread between 3-month GBP LIBOR and the expectation
 -50
 regarding the corresponding Compounded RFR i.e. the
 2001
 2002
 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019
 2020
 3-month GBP Overnight Index Swap (”OIS”) rate.
 Daily differences 3 Month median The difference between the 3-month GBP OIS rate and
 ISDA Fallback Spread, calculated historically
 the realised SONIA rates lies in the quality of the market
Source: The ICE, BOE and FTI Analysis
 information available at each point in time. Since no one
It is clear from Figure 2 that the daily spread is not can predict the future, unexpected large market moves will
constant and although it is mostly positive, it can also inevitably skew the difference between expectations and
turn negative. Therefore, the ISDA Fallback Spread, which reality. These extreme events will in general occur during
will be fixed as a constant, is not a perfect substitute for stressed periods such as the GFC, as shown in Figure 4.
the differences between LIBOR and the corresponding
 Figure 3 below shows the daily spread between 3-month
Compounded RFR in all market circumstances.
 GBP LIBOR and the 3-month GBP OIS rate (“Expected
As shown in Figure 2, the 5-year median, calculated as per Spread”). Figure 3 illustrates that the Expected Spread
the ISDA Fallback Spread methodology, responds slowly (which is known at the time of fixing LIBOR) behaves
and disproportionately to abnormal market conditions similarly to the spread used in the ISDA Fallback Spread
such as the GFC. This observation is due to the long calculation (which is unknown at the time of fixing LIBOR).
window retained to compute the ISDA Fallback Spread.
In theory, a median computed over 5 years of data could FIGURE 3: HISTORICAL DAILY SPREAD BETWEEN 3-MONTH GBP LIBOR AND
 THE 3-MONTH GBP OIS RATE (IN BASIS POINTS)
bring the first observation point as the median, resulting
in a significant lag in the information. 300

As shown in Figure 2 a shorter window of 3 months to 250
compute the median would be more responsive to market
 200
circumstances. Regardless, computing the median over
shorter terms would not solve the problem of LIBOR being 150
discontinued. Moreover, it would not be optimal to fix the
 100
ISDA Fallback Spread at a level that is not reflective of the
long-term relationship between LIBOR and RFRs. 50
Therefore the 5-year median retained for the ISDA Fallback
 0
Spread provides a compromise to a complex problem.
Although it could be seen as arbitrary, it is the method -50
 2001
 2002
 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019
 2020

retained in consultation with the industry in the spirit of a
smooth LIBOR transition. Source: Bloomberg (BPSWSC BGN Curncy), The ICE, BOE and FTI Analysis

Alternative approaches to address the shortcomings Figure 4 shows the difference between the 3-month
of the median approach to the ISDA Fallback Spread: GBP OIS rate and SONIA compounded over 3 months,
looking at forward RFRs and questioning the which is essentially the difference between the Expected
discontinuation of LIBOR. Spread and the daily spread shown in Figure 2. Figure
As 3-month GBP LIBOR is known at each LIBOR fixing but 4 illustrates that the Expected Spread can differ
not the compounded SONIA rate, the ISDA Fallback Spread significantly from the spread used in the ISDA Fallback

LIBOR: The Final Count Down? FTI Consulting, Inc. 10

 19
Spread calculation, which relies on hindsight as it is and the remaining USD LIBOR tenors on 30 June 2023.
unknown at the time of fixing LIBOR. In simple terms, While IBA is looking to publish most USD LIBOR tenors
the daily spread used to compute the median in the until July 2023, it also leaves open the possibility of
ISDA Fallback Spread is not a good indicator of market continuing LIBORs in other currencies beyond 2021,
expectations at the time of fixing LIBOR. pending the outcome of its consultations. This was
As shown in Figure 5, the difference between the ISDA confirmed by ISDA when it announced that the IBA
Fallback Spread and the Expected Spread can be statements do not “constitute an index cessation event
significant. Therefore, while the Expected Spread resolves under the IBOR Fallbacks Supplement or the ISDA 2020 IBOR
 20

the hindsight issues resulting from using a Compounded Fallbacks Protocol”.
RFR, the value transfer resulting from employing the ISDA However, the announcements from IBA were supported
Fallback Spread is still non-negligible particularly during by both the US Federal Reserve and the FCA, indicating
stressed market conditions. The value transfer can be regulatory support for the cessation of LIBORs on the
estimated or quantified more accurately if LIBOR is known proposed dates. The US Federal Reserve has encouraged
and continues to be published. banks to cease entering into contracts referencing USD
 LIBOR as soon as practicable and in any event by 31
FIGURE 4: DIFFERENCE BETWEEN THE SPREAD IN FIGURE 2 AND THE SPREAD
 December 2021. Under the UK Financial Services Bill
IN FIGURE 3 (IN BASIS POINTS)
 proposed on 21 October 2020, the FCA would have
 200
 the power to prohibit the use by supervised entities in
 150 the UK of a critical benchmark (such as LIBOR) where
 a benchmark administrator has confirmed that the
 100 benchmark will cease. The FCA has stated that: “we
 may exercise this power if we consider doing so protects
 21
 50 consumers or market integrity”.
 The continuation of USD LIBOR for certain tenors means
 0
 that even if the 1-week and 2-month USD LIBOR were
 -50
 to discontinue after December 2021, the derivatives
 referencing these rates will not be subject to the ISDA
 2001
 2002
 2003
 2004
 2005
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019
 2020

 fallback rate. As the other USD LIBOR tenors would
Sources: see Figure 2 and Figure 3 continue to be available and representative, the rate would
 be determined using linear interpolation under the ISDA
FIGURE 5: DIFFERENCE BETWEEN THE SPREAD IN FIGURE 3 AND THE ISDA 22
 terms. However, when all USD LIBOR tenors cease after
FALLBACK SPREAD, CALCULATED HISTORICALLY (IN BASIS POINTS)
 300
 June 2023, swaps referenced to USD LIBOR would fall back
 to the fallback rate (i.e., SOFR plus the spread adjustment).
 250
 In these cases, the spread adjustment would be fixed at
 200 the time of the announcement relating to all USD LIBOR
 23
 150 tenors, which is currently expected in early 2021.

 100 At the time of publishing this paper the FCA released a
 statement mentioning that the FCA envisages “requiring
 50
 continued publication of a LIBOR setting on a synthetic
 0 basis” which is supportive of the views expressed in this
 -50 article.24

 The recent developments in
 2006
 2007
 2008
 2009
 2010
 2011
 2012
 2013
 2014
 2015
 2016
 2017
 2018
 2019
 2020

Sources: see Figure 2 and Figure 3
 the markets for securities and
Continuation of USD LIBOR after 2021 derivatives
On 30 November 2020, the IBA announced that it would Considerable progress has already been made in relation
consult on its intention to cease the publication of the to the transition from GBP LIBOR with the adoption of
1-week and 2-month USD LIBOR on 31 December 2021, SONIA in new public issues of GBP-denominated FRNs,

LIBOR: The Final Count Down? FTI Consulting, Inc. 11

covered bonds and securitisations. As of September 2020, FRNs that is maturing after 2021. Figure 6 shows the
SONIA-linked FRNs and securitisation issuance amounts breakdown of notional outstanding for GBP LIBOR-linked-
to over £90bn since June 2018, and public issuance of GBP FRNs by maturity after the end of 2021, with £7.2 bn
LIBOR-linked FRNs and securitisations with a maturity notional outstanding maturing in 2022, £6.4 bn notional
 25
beyond the end of 2021 has all but ceased. outstanding maturing in 2023 and £6.6 bn notional
The Working Group on Sterling Risk-Free Reference outstanding maturing after 2023. In contrast, there is
Rates, working with the FCA and BOE, has recommended c.£51.3 bn of notional outstanding for SONIA-linked FRNs
that lenders should (i) make non-LIBOR linked products that is maturing after 2021.
available to their clients by the end of Q3 2020 (ii) include FIGURE 6: NOTIONAL OUTSTANDING FOR FRNS MATURING IN 2021 AND AFTER
clear contractual arrangements in all new and refinanced (GBP BILLIONS)
LIBOR-referencing loan products after Q3 2020, to facilitate 40
conversion from LIBOR to an alternative rate before the 35
end of 2021 through pre-agreed conversion terms or an
 30
agreed process for renegotiation; and (iii) not sell LIBOR-
referencing loan products that expire after the end of 2021 25
 26
after Q1 2021. 20

In this context, we discuss the recent development 15
surrounding derivative products referencing LIBOR and 10
RFRs. For consistency with previous the section, where
 5
we focused on ISDA fallback proposition in the context of
 -
SONIA, we focus on securities and derivatives referencing 2021 2022 2023 2024 and
GBP LIBOR. After
 SONIA Outstanding GBP LIBOR Outstanding

Outstanding FRNs indexed on GBP LIBOR by 2022, Source: Bloomberg and FTI Analysis
ranked by tenor
 Figure 7 shows the breakdown of notional issued
There are a number of outstanding GBP LIBOR-linked between 1 January 2019 and 4 December 2020 for GBP-
FRNs, covered bonds, capital securities and securitisations denominated FRNs by maturity. It shows that notional
that are due to mature after the end of 2021 (“Legacy issued for SONIA-linked FRNs represent the significant
 27
Transactions”). proportion of the notional issued for FRNs, especially for
Legacy Transaction may contain fallbacks that would FRNs maturing after 2022, showing that significant transfer
typically result in the bond falling back to the rate in effect has taken place from FRNs referencing GBP LIBOR to those
for the last preceding interest period, which will be applied referencing SONIA.
to every interest period for the remaining life of the bond,
 FIGURE 7: NOTIONAL ISSUED BETWEEN JANUARY 2019 AND DECEMBER 2020
resulting in a bond falling back to a fixed rate at the end FOR FRNS MATURING IN 2021 AND AFTER (GBP BILLIONS)
 28
of LIBOR. This could have negative consequences for 30
consumers, who might be left with an unattractive fixed
rate, and lenders, who might need to adjust the hedges on 25
their loan portfolios.
 20
Moreover, some of these bonds may contain no fallbacks
at all, meaning there is no default position on the 15
permanent cessation of GBP LIBOR. This could lead to
 10
disputes if such contracts are not addressed before the
end of GBP LIBOR. 5
We have analysed data for outstanding corporate and
 -
government GBP LIBOR-linked FRNs that are part of 2021 2022 2023 2024 and
 After
the Legacy Transactions. According to the data, there is
 SONIA Issued GBP LIBOR Issued
c.£20.2 bn of notional outstanding for GBP LIBOR-linked
 Source: Bloomberg and FTI Analysis

LIBOR: The Final Count Down? FTI Consulting, Inc. 12

Recent liquidity in the market for RFR derivatives As shown in Figure 10, OIS traded notional has typically
 been characterised by short-term tenors, with an average
The market for vanilla interest swaps denominated in
 of 93% of total OIS traded notional being transacted in
GBP has been steadily transitioning to SONIA over the
 tenors of 1 year and under. This contrasts to IRS traded
last few years. We have analysed transaction data for
 notional, which is concentrated in longer tenors (2 years
OIS and fixed-for-floating interest rate swaps (“IRS”)
 and over). However, the proportion of OIS when compared
referenced in GBP for the past five years from ISDA
 29 to IRS has been increasing across all tenors from 2 years
SwapsInfo. The OIS referenced in GBP will be linked to
 and above, over the period from 2016 to 2020.
SONIA while the IRS will typically be linked to GBP LIBOR.
Therefore, we have used this data to analyse the trends FIGURE 10: TOTAL TRADED NOTIONAL (%), OIS DARK, IRS LIGHT, 2016-2020
in traded notional of swaps linked to GBP LIBOR and the 100%
corresponding RFR (i.e. SONIA). 90%
 80%
According to the data we analysed from ISDA SwapsInfo,
 70%
OIS annual traded notional has been on average c.52%
 60%
higher than IRS from 2016-2019. However, record-highs
 50%
were recorded this year with c.USD$15.6 trillion of OIS 40%
notional traded until 21 November 2020, 239% higher than 30%
the IRS notional traded during the same period. This is 20%
predominantly due to unprecedented highs at the peak 10%
of the COVID-19 pandemic, with over 50% of recorded OIS 0%
 10 Other
traded notional in the year-to-date occurring in Q1 2020. 2016 2017 2018 2019 2020
 Source: SwapsInfo, FTI Analysis
FIGURE 8: GBP OIS TRADED NOTIONAL (USD TRILLIONS), 2016-2020

 9 On the other hand, cross-currency swaps have been slow
 8 to transition to the RFRs. The first cross-currency swap
 7 involving RFRs on both legs was transacted in November
 6 2019 and involved a cross between SOFR and the euro
 30
 5 short-term rate (€STR). Since then, only 21 cross-currency
 4 swaps with RFRs on both legs have been reported to the
 3 Depository Trust & Clearing Corporation’s (DTCC) trade
 2 repository. The total notional of these swaps, which is
 1 less than $1 billion, also represents less than 1% of the
 0 total notional of cross-currency swaps. Industry observers
 expect cross-currency swaps with RFRs on both legs to
 31
 become standard by the end of 2021. However, given
 10 Other
 the slow transition, there may be a significant number of
FIGURE 9: GBP IRS TRADED NOTIONAL (USD TRILLIONS), 2016-2020
 Legacy Transactions for cross-currency swaps at the end of
 2.0 32
 the transition period.

 1.5

 1.0

 0.5

 0.0

 10 Other

Source: SwapsInfo, FTI Analysis

LIBOR: The Final Count Down? 13

Conclusion on the economics and derivatives referencing RFRs could signal that
 the industry is on a journey for a smooth and orderly
of the transition and the value transition, the LIBOR transition remains a complex
transfer journey. Financial products and situations not addressed
 by the fallback reforms will face issues as a result of
This paper touches on some of the challenges the LIBOR transition. Not discontinuing the publication
underpinning one of the most important economic of LIBOR in parallel could help the industry in such
variables in the world. Although the industry situations, specifically regarding negotiations on
initiatives on RFRs and fallback provisions and the the economics of value transfer in the context of the
recent developments in the issuance of securities transition from LIBOR to an RFR.

 How FTI Consulting can help?
 We cumulate decades of experience in trading, investment management, valuation, risk management and
 regulation covering a wide range of complex financial instruments and derivatives across asset classes. Our
 team is composed of industry experts, having worked for global and leading financial institutions, and bring
 quantitative expertise in developing models and risk analytics in complex trading environments. Having been
 involved in many precedent market turmoils, FTI Consulting has a long track-record at providing independent
 valuation and risk management solutions as well as financial and economic expertise in special situations such
 as restructurings and transactions advisory, and providing independent expert opinions and testimonies in
 the context of disputes, litigations, arbitrations. It is not possible to determine at this stage how well the LIBOR
 transition will be handled and the potential adverse consequences. FTI Consulting will continue to monitor
 market developments in order to best assist its clients when the need arises.

 The views expressed in this article are those of the
 author(s) and not necessarily the views of FTI Consulting,
 its management, its subsidiaries, its affiliates, or its other
 professionals.

BRUNO CAMPANA ESTHER MAYR DENIS DESBIEZ ALEX CANAVEZES
Senior Managing Director Senior Managing Director Managing Director Senior Affiliate
+44 (0)20 3727 1081 +44 (0)20 3727 1165 +44 (0)20 3727 1387 alex.canavezes@fticonsulting.com
bruno.campana@fticonsulting.com esther.mayr@fticonsulting.com denis.desbiez@fticonsulting.com

BADR IFTIKHAR ANDREW RENNIE BEN RODMAN TOM CORDREY
Director Senior Affiliate Consultant Consultant
+44 (0)20 3727 1365 andrew.rennie@fticonsulting.com +44 (0)20 3727 1525 +44 (0)20 3319 5670
badr.iftikhar@fticonsulting.com ben.rodman@fticonsulting.com tom.cordrey@fticonsulting.com

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate
risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting
professionals, located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and
overcome complex business challenges and opportunities.©2021 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com.
 1283 - 01/21

ANNEX 1each
 ‐ Calculation ofRecord
 Tenor and each Rate Fallback Rate
 Day on and , and Accrual End Date , , the day count
 1.1 Thefollowing
 Fallback Rate, the Fallback R, with Raterespect Base to Date, shall be
 an IBOR, S ,fraction
 E , means, calculated
 with respect in accordance to Accrualwith Startthe Date
 each calculated
 Tenor and by the each Adjustment
 Rate Record Services
 Day on Vendor
 and in , following
 and Accrual formula:End Date , , the day count
1.1 LIBOR:TheThe Final Count Down?
 Fallback
 accordance
 following theRate, with
 Fallback R, the with
 Rate respect
 following
 Base Date, to an
 formula, IBOR,
 shall and
 be S ,E , means,
 fraction calculated with respect in accordance to Accrual with Start
 the
 FTI Date Inc. 14
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 Capital Markets
 End in� , , the day count in a crisis
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 each rounded
 calculated Tenor by toand
 thetheeach nearest
 Adjustment RateRounding
 Record
 Services Day Precision
 on and
 Vendor in , and Accrual
 following formula: ��,�, �Date �,� ��
 following
 (breaking
 accordance thewith Fallback
 ties the Rate Base
 by rounding
 following halfDate,
 formula,away shall
 from
 and bezero): fraction calculated in accordance with the
 �� �,� , �,� �
 ANNEX 1 ‐ Calculation of Fallback Rate
 calculated
 rounded tobythe thenearest
 Adjustment
 Rf,t =Rounding Services
 ARRf,t + SA
 Vendor in
 Precision following Where: Days(
 ��,�, � �,� , �
 formula: , , ) means the number of
 
 f,t Calendar Days from and including �� Accrual Start
 ANNEX 1 - Calculation of
 accordance
 (breaking ties
 Where:
 with bythe following
 rounding halfformula,
 away from andzero):
 Where: DateDays( , �to and
 , , �
 �� �,� , �,� �
 excluding
 , ) means Accrual the number End Date of , ;
 rounded to the nearest Rounding Precision �,�, ��,�
 Fallback Rate
 1.1 (breaking The Fallback
 , means ties by the
 Rf,t = ARRf,t + SAf,t
 Rate, R,half
 rounding
 Fallback Rate
 withaway respect
 forfrom
 Tenor
 tozero):
 an IBOR,
 on
 Calendar fraction Days calculated
 from and
 P , means the set of Reference Rate Business
 ��
 in accordance
 including with
 Accrual the
 Start
 Where: each Tenor and each Rate Record Day on and Where:
 Datefollowing
 Where: Days(
 , to and , ,excluding
 formula: , ) means Accrual the number End Date of , ;
 1.1 The Fallback
 Rate Record Rate, Rf,t R,
 Day withf,t respect
 = ;ARR + SAf,t to an IBOR, each Days occurring in the period from and including
 following the Fallback Rate Base Date, shall be Calendar Days from and including Accrual Start
 , means
 Tenor and each Rate Record
 the Fallback RateDay for Tenor on and
 onfollowing Days( 
 P the , means , , )the
 , Accrual
 meansStart
 set of the
 Date number
 Reference �� 
 , , to Rateof�,�Calendar
 and , �,� �
 excluding
 Business Daysthe
 Where: R , means
 calculated by thethe Adjusted
 Adjustment Reference
 ServicesRate Vendor for in Date , to and excluding �
 ��,�, ��,� Accrual End Date , ;
 the Fallback
 Rate Record Day ; Rate Base Date, shall be calculated by fromDays and
 Accrual
 occurring including
 End Date
 in Accrual
 the period
 , ; Start
 from Date
 and to
 including
 ��
 , 
 and
 Tenor
 accordance on Rate withRecord the followingDay ; and formula, and
 the
 Adjustment
 , means theServices Fallback Vendor Rate forinTenor accordance on with excluding
 P , Accrual
 the means Accrual the
 Start set End
 Dateof Date , , 
 Reference to ; Rate
 and Business
 excluding the
 R rounded
 , meansto thethe Adjusted
 nearest Reference
 Rounding Rate Precisionfor Where:
 meansDays( a Reference , , , Rate ) means , the number
 Business Day; of
 the 
 following
 Rate Record Day ;
 , means the
 formula, Spreadand Adjustment
 rounded to for
 the Tenor
 nearest Days
 Accrual
 P , means occurring End Date
 theDays in the
 
 set offrom period
 ; from
 ,Reference Rate Business Days
 and including
 Tenor on Rate
 (breaking tiesRecord
 by Day ; half
 rounding and away from zero): Calendar and including Accrual Start
 Rounding on Rate Record
 Precision Day
 (breaking . ties by rounding half the Accrual + 1 means Start the
 Date Reference
 , , to and Rate Businessthe
 excluding Day
 R , means the Adjusted Reference Rate for occurring
 means Date in the period
 , to and excluding
 a Reference from
 Rate Business and including
 Accrual Day;Endthe Accrual
 Date , ;
 means
 , from
 away the Spread
 zero): Rf,t Adjustment
 = ARRf,t + SAfor Tenor Accrual immediately End Date succeeding
 ; Reference Rate Business
 Calculation
 Tenorof Adjusted
 on Rate Record Reference Day Rate ; and
 f,t Start Date , to and , excluding
 the Accrual End Date ;
 1 Pmeans means
 ; the the set of Reference RateDay Business , 
 , 
 on Rate Record Day . + Day , Reference Rate Business
 1.2 ,The Where: Adjusted Reference Rf,t = ARRf,t Rate, + SAf,t RR, with respect meansaaReference
 means Reference Rate Rate Business Business Day; Day;
 means the Spread Adjustment for Tenor immediatelyDays occurring succeeding in theReference period from Rate and including
 Business
 Calculation of Adjusted Reference Rate , +1 means, with respect to Reference Rate
 Where:
 on Rate to
 an IBOR, Day
 , means
 Record
 each .Tenor and
 the Fallback Rateeach Rate Record
 for Tenor on ++11the
 Day ; Accrual
 means
 means the Start
 theReference
 Reference DateRate , ,Business
 Rate to and excluding
 Business DayDay the
 Business Days and + 1, the day count fraction
 1.2 The Day
 Rf,t Rate Adjusted
 means on
 Record and following
 Reference the
 Rate, Adjusted
 RR,
 Day ; Rate for Tenor on Rate
 the Fallback with Reference
 respect Accrual
 immediatelysucceeding
 immediately End Date
 succeeding Reference ;
 ,Reference RateBusiness
 Rate Business Day ;
Calculationto ofan Adjusted
 Rate Base Reference
 Date, shall Rate
 be calculated by the , calculated
 +1 means, with in accordance
 respect to with Reference the following
 Rate
 Record IBOR, each
 ; Tenor and each Rate Record Day ;
1.2 RDay , means the Adjusted Reference Rate withfor Business means
 means,
 , +1formula: Days a Reference
 with andrespect + 1,Rate tothe Business
 Reference
 day count Day;
 Rate Business
 fraction
 The on and
 Adjusted
 DayAdjustment Reference
 Services
 following Rate,
 theVendor
 Adjusted
 RR, with
 in accordance respect
 Reference
 ARRf,t Tenor means on
 Date,the Rate Record
 Adjusted Day
 Reference ; and Rate for Tenor Days , +1 means,
 calculated and in+with 1, the
 accordance respect day count to Reference
 with fraction
 the following calculated in
 Rate
 to
 Rateanthe IBOR,
 Base following each formula,
 Tenor
 shall and
 and
 be calculated eachrounded Rate
 by the to the
 Record + 1 means the Reference �� , Rate Business
 � 1� Day
 on Rate Record Day ; and accordance
 Business
 formula: with
 Days and the
 �,��� following
 � formula:
 + 1, the day count fraction
 Day nearest
 Adjustment on , and
 means Rounding
 following
 Services the Spread Precision
 the Adjusted
 Vendor in (breaking
 Adjustment Reference
 accordance fortieswith
 Tenorby immediately succeeding Reference��Rate Business
 
 calculated in accordance with the following
 Rate
 therounding
 SAf,t Base
 means
 following Date,
 the half shall
 away
 Spread
 formula, beand calculated
 from
 Adjustment zero): bytothe
 . rounded for Tenor
 the on Rate Day ;
 on Rate Record Day
 formula: Where: �,��� � �� , � 1�
 Adjustment
 Record
 nearestDay Rounding .Services Vendor
 Precision in accordance
 (breaking
 ties with
 by ��
 Calculation of Adjusted Reference Rate� � 1 , +1 means, with respect
 Days( , + 1) means the number
 to Reference Rate
 the following
 rounding half 
 formula,
 away
 �,� � from and rounded
 zero):
 �� to the �� , � 1� of Calendar
 CALCULATION OF ADJUSTED REFERENCE RATE ��,�, ��,� Where:
 Where: Business �,��� Days � and + 1, the day count fraction
 1.2 nearest TheRounding Adjusted Reference Precision Rate,
 (breaking ties RR, with respect Days from and including �� Rate Business
 Reference
 1 by Days( , calculated
 + 1) in
 means accordance the with of the followingDays
 thenumber of Calendar
 1.2 The Adjusted Reference Rate, �
 ARR, withRate respect to an
 rounding to an IBOR,
 half �,�away�each fromTenor and
 zero): �each Record Days( Day , to + 1) and means excluding Reference
 number Rate Business
 Calendar
 � � �
 �� ��,�, �1 � �,��� � 
 ��,�Day on �and � Where: formula:
 IBOR,Day each on Tenorand followingand eachthe Rate Record
 Adjusted Reference from and
 Day including
 + 1; and
 Days from and including Reference Rate Business Reference Rate Business Day to
 
 �����,� � 1
 following Rate the�,�Adjusted
 Base Date,
 � shall Reference
 be calculated �Rate Base by the Date, shall and excluding
 Day ,to and
 Days( Reference
 + 1) excluding
 means theReference Rate
 number Business
 �� ,ofRate Day
 Calendar
 � 1� Business + 1; and
 
 � � � �1 ��� � � �
 ��,�, ��,�
 �,��� F means the �,��� Value � of the Reference Rate on
 be calculated
 Adjustment by Services
 the Adjustment
 � 1�Vendor Services
 in accordance Vendor in
 with Days
 F Day means from + 1;and andtheRate including
 Value of Reference
 the 
 Reference Rate Business
 ���� �,� Reference Business Day . ��Rate on
 accordance the following with the following
 formula, andformula,
 roundedand to the rounded Day to and
 Reference Rate excluding
 BusinessReference Day . Rate Business
 � � � �1 � �,��� � � � F Where: means the Value of the Reference Rate on
 to thenearest nearestRounding Rounding Precision
 Precision (breaking
 (breaking ties ties
 by by Calculation
 Day of+ Spread
 1; and Adjustment
 � 1� �����,� Reference
 CALCULATION OF Rate Business Day .
 number
 rounding rounding half away half away fromfrom zero): zero): 1.3 F The Days( Spread ,SPREAD
 +Adjustment,
 1) meansADJUSTMENT the A, of Calendar
 with respect to an
 means the Value of the Reference Rate on
 Where: Calculation
 1.3 The of Days
 Spread
 Spread
 IBOR, each fromAdjustment,and
 Adjustment including A, Reference
 with respect Rate to Business
 an IBOR,
 � 1�
 � 1 Reference Rate Tenor Business and Dayeach . Rate Rate Record Day 
 �,� � � each Day
 Tenor to
 and
 and excluding
 each Rate Reference
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