On November 23, 2020, the Loan Market Association (the “LMA”) Announced the publication of several new and revised documents, with the aim of helping market participants to incorporate appropriate bridging mechanisms into their loan documentation.
1. New multi-currency forward exposure draft and revolving facility agreement incorporating rate change provisions (lookback with change of observation) (“Rate change agreement (Lookback with change of observation)”)
Previously, the LMA had only published such an agreement with no observation lag. This publication follows the recognition of the look-back mechanism as a “viable and robust alternative” by the Pound Sterling Risk-Free Benchmark Working Group (the “Work group”) In their recommendations
The main difference between hindsight analysis with and without a change of observation comes from the weighting of the daily risk-free rates in the formula and how this weight is used to treat non-business days. These differences are documented in appendices 16 (Compound non-cumulative daily RFR rate) and 17 (Cumulative compound RFR rate) rate change agreements.
The Rate Switch Agreement (Lookback with Observation Shift) is only an Exposure Draft and is therefore not a recommended final form of AML.
2. Revised multi-currency forward exposure draft and revolving facility agreement incorporating rate change provisions (lookback without change of observation) (“Rate change agreement (Lookback without change of observation)”)
The LMA published a revised version of the Rate Switch Agreement (Lookback without Observation Shift) following initial market reactions. This is an Exposure Draft only and not a recommended final form of the LMA.
3. Revised Commentary Regarding Rate Change Agreements
Commentary on Rate Change Agreements has been updated to reflect changes to the Rate Change Agreement (Lookback without Observation Shift) and the publication of the Rate Change Agreement (Lookback with Observation Shift) . Updates to the commentary include, but are not limited to: (a) a note that the rate change agreements are identical, except for the calculation provisions contained therein; (b) confirmation that the “Early Rate Change Initiation Events” set forth therein are intended to reflect “Index Cessation Events” as defined in ISDA 2006 (as amended by the Supplement to ISDA IBOR fallback, to which
see here); and (c) further guidance on determining a credit adjustment spread.
4. Term for rate change facility agreements
This newly published list of conditions has been drafted in such a form that it can be used with either of the rate switching facility agreements.
5. Conditions of use of the RFR with supplement to the revised replacement of the language of the screen tariff
Finally, the LMA has published RFR terms. These follow on from the LMA’s August 2020 “Note on revised screen rate clause replacement and documentary recommendations issued by the UK Pound Risk-Free Reference Rates Working Group”, which contained a supplement to the AML Screen Fee Replacement Clause which is designed to facilitate fulfillment of the Working Group’s documentary recommendations of April and July 2020. This supplement contained a placeholder for the terms agreed to at the ‘advance. These RFR Terms are intended to be used in conjunction with the space provided for pre-agreed terms in the Supplement to assist market participants in this regard.