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In September 2020, the Loan Market Association in the UK published an exposure draft multicurrency term and revolving facilities agreement incorporating rate switch provisions with pre-agreed conversion terms. The exposure draft came out as a response to the recommendation from the UK Working Group on Sterling Risk-Free Reference Rates that, after Q3 of 2020, lenders should include clear contractual arrangements in all new and refinanced LIBOR loan products to facilitate the conversion of LIBOR to SONIA (or other alternative rates) through pre-agreed conversion terms or an agreed process for renegotiation.
Under the exposure draft, interest is originally linked to an existing forward-looking term (e.g. LIBOR for sterling). The interest rate will then switch to the pre-agreed alternative rate calculated on a compounded basis (e.g. compounded SONIA for sterling) on a pre-agreed date prior to 31 December 2021 or upon occurrence of a specified trigger event. The exposure draft is based on lookback without observation shift and a non-cumulative compounded methodology. For more information, please click here to access the exposure draft and other IBOR-related documents issued by the LMA (members only).
It should be noted that the exposure draft does not constitute the LMA’s recommended form for rate switch agreements. The LMA is also planning to publish a form of the rate switch agreement based on lookback with observation shift.
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