LIBOR Transition A Practical Guide August 2020 Edition

SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.2 - PA BIB.
docx
LIBOR Transition
A practical guide
August 2020 Edition
August, 2020 1
SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.2 - PA BIB.docx
Table of Contents
LIBOR Transition __________________________________________________________________________________ 1
A practical guide _________________________________________________________________________________ 1
August 2020 Edition ______________________________________________________________________________ 1
1. LIBOR Transition: Executive Summary __________________________________________________ 4

What does this document seek to do? _________________________________________________ 4
Summary _________________________________________________________________________ 4
Practical considerations checklist ______________________________________________________ 4
Key highlights _____________________________________________________________________ 4
What's next? ______________________________________________________________________ 4
2. LIBOR Transition: Facts and Figures ____________________________________________________ 5

What is LIBOR? ____________________________________________________________________ 5
Where is LIBOR used? _______________________________________________________________ 5
What is happening to LIBOR and by when? _____________________________________________ 5
What has the response been to date? __________________________________________________ 5
What are the main Alternative Reference Rates? _________________________________________ 6
How do these ARRs differ to LIBOR? ___________________________________________________ 7
Are these ARRs secured or unsecured? _________________________________________________ 7
Will the ARRs have forward looking term structures? _____________________________________ 7
What are ARR Compounded Index Rates? ______________________________________________ 7
What about the other IBOR benchmark Rates? __________________________________________ 7
Summary and Practical Considerations _________________________________________________ 8
3. LIBOR Transition: Discounting Risk _____________________________________________________ 9

What is discounting risk? ____________________________________________________________ 9
What are the implications for CSAs? ___________________________________________________ 9
How are the CCPs approaching the change? ____________________________________________ 9
Why will these changes drive an increased Bilateral Negotiation of CSAs? ___________________ 10
When will UBS be ready to open CSA negotiations? _____________________________________ 10
What is the impact on swaption contracts? ____________________________________________ 10
What is the UBS current stance on swaption voluntary compensation? _____________________ 10
Summary and Practical Considerations ________________________________________________ 11
4. LIBOR Transition: Forecasting Risk ____________________________________________________ 12

What is Forecasting Risk? ___________________________________________________________ 12
What are the Fallback Provisions? ____________________________________________________ 12
2
What are some examples of differing fallback methods? _________________________________ 13

How will the LIBOR transition affect contracts executed under the updated Definitions? _______ 13
How will the LIBOR transition affect the existing contracts? _______________________________ 13
What is expected to happen to cleared contracts? ______________________________________ 13
How will the LIBOR transition affect products other than OTC derivatives? __________________ 14
How could hedge effectiveness across asset classes via linked transactions be affected by the LIBOR
transition? _______________________________________________________________________ 14
What is the ISDA LIBOR to ARR adjustment? ___________________________________________ 14
What are the ARRC's recommended best practices? _____________________________________ 14
What is Pre-Cessation? _____________________________________________________________ 15
What is 'Synthetic LIBOR'? __________________________________________________________ 15
What are the implications of 'Synthetic LIBOR' on Transition? _____________________________ 15
What has been the reaction to the HM Treasury announcement so far? ____________________ 16
Why is the Transition challenging for certain products? __________________________________ 16
Why might these Forecasting Risk changes drive increased bilateral/ multilateral negotiation? __ 16
What are the main drivers that may determine the impact on Forecasting Risk? ______________ 16
Summary and Practical Considerations ________________________________________________ 17
5. From 2017 to Date: Regulatory and Market Milestones ______________________________ 18
6. Upcoming Regulatory and Market Milestones ______________________________________ 19
7. Appendix _______________________________________________________________________ 20
From 2017 to Date: Regulatory and Market Milestones __________________________________ 20
Upcoming Regulatory and Market Milestones __________________________________________ 23
Other IBORs Benchmark Rates _______________________________________________________ 26
Overnight Index Swap Industry Definitions _____________________________________________ 27
ARR detailed information ___________________________________________________________ 27
8. Bibliography ____________________________________________________________________ 28
9. Glossary ________________________________________________________________________ 29
10. Disclaimer _______________________________________________________________________ 30
11. Contact information _____________________________________________________________ 31
3
1. LIBOR Transition: Executive Summary

What does this document seek to do?
This guide aims to give UBS clients an understanding of the LIBOR transition and highlights the practical
considerations that should be taken into account. This communication is not sent to you in connection with any
wealth management, corporate or institutional client or asset management relationship you may have with UBS.
Summary
Regulators have announced that by the end of 2021 the market should stop relying on LIBOR. Each of the
Alternative Reference Rates (ARRs) for the five major currencies (USD, EUR, GBP, CHF, JPY) involved is at a different
stage in terms of development and liquidity. In due course other currencies' alternative rates may be developed but
the initial focus has been on these five. The industry needs to understand, prepare and execute with respect to this
market change.
LIBOR is used as a reference rate in a multitude of products and links, for example between a derivative and an
underlying asset, need to be considered in order to understand potential basis risk between LIBOR and the new
ARR. In addition to migration of transactions, industry changes in discounting methodology are planned and
changes in technology systems may be required.
UBS aims to keep clients informed of these changes and is running an extensive internal change programme
focussed on this transition. Note that EURIBOR and TIBOR are expected to remain into medium term so industry
focus is on the other rates.
Practical considerations checklist

 Understand what this change means for you:
– Analyse the exposure you currently have to LIBOR and assess the potential financial impact
– Ensure you know where you have transactions which you believe to be linked (see Forecasting Risk Section)
– Review the fallback language in your Legal Documentation (see Forecasting Risk Section)
 Review your readiness:
– Evaluate whether you need to make any changes to your risk management systems
– In addition, consider any operational processes you may need to update, for example ensuring all reference
data sources are updated accordingly
– Consider consolidating your LIBOR exposure to reduce the number of bi-lateral transitions required
Key highlights
Facts and Figures Discounting Risk Forecasting Risk
 5 ARRs have been identified  Discounting rate and interest paid  Updated ISDA Definitions due to be
to replace the 5 LIBOR on collateral usually aligned published in Q3 2020
currencies  Switch in discounting rates to  Differences in fallback methodology
 Each ARR is an overnight rate ARRs by CCPs is likely to be a key across different product types may
 The ARRs are backward driver for increased adoption of impact hedge effectiveness across
looking rates ARRs across the industry transactions believed to be linked
 Adjustment methodology  Any changes to the margin annex  Evaluation of current contractual
agreed to address the for a derivative contract should fallback provisions may lead to
differences (term and credit) reference the new ARR to replace increased bilateral discussion
between LIBOR and ARRs. existing cash margin rate
What's next?
When relevant, UBS will be contacting you in due course on the following topics:
 Trades with UBS referencing LIBOR;
 Contracts with UBS which reference a transitioning benchmark.
If you have any further questions, in the first instance please contact your sales representative. Alternatively, please
get in touch via UBS-IB-LIBOR@ubs.com.
4
2. LIBOR Transition: Facts and Figures

What is LIBOR?
The London Interbank Offered Rate (LIBOR) is calculated from submissions by selected "panel" banks1 of the rates
they either pay or would expect to pay to borrow from one another.
LIBOR is a widely-used interest rate benchmark. Rates are determined daily by the LIBOR administrator, the ICE
Benchmark Administration (IBA), for various currencies (USD, EUR, GBP, CHF, JPY) and tenors (Overnight, 1w, 1m,
2m, 3m, 6m and 12m).
Where is LIBOR used?

According to IBA, LIBOR is used to determine periodic interest payments for many hundreds of trillions of notional
of financial products globally, and is used for example in derivatives, bonds, structured products, securitised
products and loans.
What is happening to LIBOR and by when?

Just over a decade ago, the market's perception of an increase in inter-bank credit risk inherently contained within
LIBOR led to a widening of the basis between LIBOR and short-term interest rate futures. Financial institutions
began to switch from using LIBOR to Overnight Index Swap rate (OIS) for discounting purposes, which was seen as
being closer to a risk-free rate. At the same time, liquidity in the unsecured lending market, which underpins LIBOR,
declined as banks became increasingly unwilling to lend to one another on an unsecured basis. The concern was
that a lending rate, based on an increasingly less liquid market, was being used to reference many multiples of
financial contracts. As a result, in 2017, the FCA announced that the market should transition to alternative
reference rates based firmly on transactions, with panel bank support for current LIBOR agreed only until the end
of 2021.
The end-2021 deadline has been reiterated by regulatory bodies around the world and, despite market-driven
transition challenges triggered by the COVID-19 pandemic, the FCA2 has stated that the transition away from
LIBOR still needs to happen by the end of 2021.
What has the response been to date?

In response to these concerns on LIBOR, the Financial Stability Board's (FSB) review produced the basis for the 19
principles developed by the International Organization of Securities Commissions (IOSCO) 3. One of the key IOSCO
1 https://www.theice.com/iba/libor#methodology
2 https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans
3 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf
5
principles was that a new "representative" benchmark reference rate should wherever possible be based on
transactions and not expert judgement.
Since the initial FCA statement in 20174, national working groups (see Forecasting Risk section) have been set up
with the support of regulators and central banks with broad industry and market representation. These working
groups have recommended alternative benchmarks for each of the LIBOR currencies. These alternatives are viewed
as more robust benchmarks, compliant with IOSCO principles and are underpinned by larger volumes of observable
transactions.
What are the main Alternative Reference Rates?

Different jurisdictions have developed different methodologies for their new ARRs, and as illustrated in the
timelines in the appendix, these are all at different stages in terms of market liquidity and development. These ARRs
are managed by different administrators, as outlined below.
Underlying
Legacy transactions
Reference Secured vs Rate
Jurisdiction Working Group Rate Target ARR Unsecured Administrator Comments
US Alternative USD LIBOR Secured Secured Federal Reserve
Reference Rates Overnight Bank of
committee Financing Rate New York
(ARRC) (SOFR)
UK Working group GBP LIBOR Sterling Unsecured Bank of England
on Sterling Risk- Overnight Index
Free Reference Average (SONIA)
Rates
Euro Area Working Group EONIA1 Euro Short Term Unsecured European Reformed
on euro risk-free Rate (€STR) Central Bank EURIBOR is
rates expected to
continue
alongside €STR
as a multiple rate
approach. The
European
Commission has
expressed
confidence in
EURIBOR for the
medium term
Switzerland The National CHF LIBOR Swiss Average Secured SIX Swiss
Working Group Rate Overnight Exchange
on Swiss Franc (SARON)
Reference Rates
Japan Study Group on JPY LIBOR Tokyo Overnight Unsecured Bank of Japan Multi rate
Risk-Free Average Rate approach
Reference Rates (TONA) planned with
TIBOR (but
Euroyen TIBOR
may discontinue)
Note:
1 This is not an IBOR, however it is being replaced by an ARR. EUR LIBOR has not been referenced as its role as a benchmark is dwarfed by the
use of EONIA or EURIBOR.
Please see the Appendix for ARR detailed Information.
4 https://www.fca.org.uk/news/speeches/the-future-of-libor
6
How do these ARRs differ to LIBOR?

The ARRs are structurally different from LIBOR and are not economic equivalents.
Components LIBOR ARRs

Methodology Based on a waterfall methodology SOFR, SONIA, €STR, SARON and TONA are
incorporating real transactions but also anchored in real transactions
expert judgement
Term Published for 7 maturities from overnight up Currently only available overnight
to one year
Credit Risk Includes a risk adjustment to account for There is minimal credit spread adjustment as the
Adjustment interbank credit spread and tenor ARRs are overnight rates and some ARRs are
secured
Rate The rate is set at the beginning of the period The rate is based on daily observations and is
only known at the end of the period
Settlement Paid at end of period There are a variety of conventions used in the
Conventions calculation of cashflows dependent on backward
looking rates:
 Compounding of the overnight ARR over the
payment period
 Averaging of the overnight ARR over the
payment period
 Lockout
 Backward Shift or Lookback
Please see Appendix Overnight Index Swap
Industry Definitions for further information on
the above
These differences may mean your risk management systems may require enhancements to manage the different
methodology of curve construction.
Are these ARRs secured or unsecured?

Some of the ARRs are secured rates, i.e. calculated from observed repos collateralized by government bonds. This
applies to SARON for CHF and SOFR for USD. The others are unsecured like LIBOR, i.e. based on unsecured
borrowing with no actual underlying security. LIBOR differs from these unsecured ARRs in that it is based not only
on observed interbank borrowing transactions but also expert judgement.
Will the ARRs have forward looking term structures?

The ARRs developed to date are overnight rates. There are several ongoing efforts by the ARR working groups
looking to develop forward looking term structures for the ARRs (except for SARON). However, a forward looking
term rate requires sufficient depth in the ARR derivatives market in order to be able to calculate the rate, so they
may not be fully available for use by 2021.
What are ARR Compounded Index Rates?

An alternative to forward looking term structures is to provide the result of compounding a rate over a period (such
as 30, 90, 180 days) and publishing these as indices. This may assist some market participants to adopt these rates
as it can limit the amount of daily compounding calculations required.
In March 2020 both the Federal Reserve and SIX began publishing 30-, 90-, and 180-day SOFR averages (as well as
a SOFR Index) and 1-, 3- and 6-month compounded SARON indices, (calculated in arrears) respectively. Such
compounded indices for SONIA have been published by Bank Of England from 3rd August 2020.
What about the other IBOR benchmark Rates?

The initial focus has been on the five ARRs detailed above. In due course other alternative rates may be developed.
See appendix Other IBORs Benchmark Rates for selected examples of those currently under review.
7
Summary and Practical Considerations

Below are some of the practical considerations clients should take into consideration for this LIBOR transition
Summary Practical Considerations include
 5 ARRs have been identified to replace the 5 LIBOR  Evaluate whether you need to make any changes to
currencies your risk management systems, specifically to ensure
that you are able to trade, manage and settle
 The ARRs are currently only overnight rates
transactions referencing a backward looking
 The ARRs are generally published the following day compounded (or simple averaged) rate as opposed
to a forward looking term rate
 The methodology to calculate an adjustment to
replace LIBOR with an ARR (to address the term and
credit differences) has been agreed by ISDA
If you have any further questions, in the first instance please contact your sales representative. Alternatively,
please get in touch via UBS-IB-LIBOR@ubs.com.
8
3. LIBOR Transition: Discounting Risk

What is discounting risk?
The derivative contracts portion of the hundreds of $trillions of contracts are held in portfolios of trades that were
either executed bilaterally between market participants (under ISDAs and if collateralized with a Credit Support
Annex (CSA)) or intermediated by Central Clearing Counterparties (CCPs). Many of these bilateral CSAs reference
Effective Federal Funds Rate (EFFR) or EONIA as the benchmark used to determine the interest paid on cash
collateral posted. The CCPs currently use EFFR to determine the margin interest rate (known as Price Aligned
Interest5 (PAI) rate) for USD activity (and prior to a switch to €STR in late July 2020 used EONIA for PAI for EUR.
Whilst the expected value of LIBOR drives the expected payments referencing LIBOR, the cashflows themselves
need to be discounted back to the present value / price for a contract or security respectively. In this case, the
change in the discounting curve on the valuation is referred to as Discounting Risk. Prior to the financial crisis, in
the derivatives market, the rate used to discount these cashflows was LIBOR. Subsequently many market
participants adopted an approach that aligned the discounting rate used with the interest rate paid (cash margin
rate) on the type(s) of collateral specified (known as Eligible Collateral) in the underlying CSA. Any change in the
discounting curve will not only change the Discounting Risk but also create a value transfer.
What are the implications for CSAs?

To reflect the eligible collateral, the current overnight benchmarks for the major currencies are used to pay PAI. For
example the EFFR is used as the PAI rate on the posting of USD cash collateral. This rate is generally used as the
discount rate to value the trade. Similarly, when it comes to posting of EUR cash collateral, EONIA is the PAI rate
and the discount rate. EMMI has announced that EONIA will be withdrawn at end of the 2021. CSAs referencing
this rate can be updated before that date, for example, by replacing with €STR.
For CSAs where non cash collateral is used, e.g. government bonds, margin interest is not transferred between
counterparties, therefore there is no need for any renegotiation to change the discounting rate used to value
the trade. The discounting rate used to value the underlying derivative contracts of these CSAs is aligned to the
funding rate for this collateral in the secured funding market. As an example, if US Treasuries are the only eligible
collateral, this could currently mean that the discount rate used is EFFR for the CSA. This rate could change to SOFR
once the secured funding market adopts SOFR as the funding rate instead of EFFR.
The CSA changes are likely to accelerate post the switch from EFFR to SOFR and from EONIA to €STR when the
CCPs make the change in 2020. The switch in discounting rates is a significant milestone for LIBOR transition as it is
expected that market participants will look to switch their discounting risk thereby establishing hedging and re-
hedging requirements in transactions referencing these ARRs: a key driver for adoption of ARRs as the market
standard floating rate.
How are the CCPs approaching the change?

LCH and CME have disclosed their plans to adopt SOFR in place of EFFR as the PAI rate and discounting rate for all
USD discounted contracts held in the exchange. In order to minimize the resulting discounting risk basis, it is
expected that some market participants will seek to renegotiate their CSAs referencing EFFR to SOFR as close as
possible to the CCP timelines. For details on the switch from EFFR to SOFR as the PAI rate and discounting of USD
activity at LCH and CME, please see the table below:
5 https://www.theotcspace.com/content/price-alignment-interest-pai
9
EFFR->SOFR LCH6 CME7

Date of 16th October 2020 16th October 2020
Change
Scope All USD discounted products All USD discounted products
Proposal  Cash and Risk compensating  All Participants take Cash and Risk compensating
Summary (EFFR/SOFR Basis) swaps for (EFFR/SOFR Basis) swaps
Members OR
 Clients can opt for Cash only & an  For participants that do not want Basis swaps,
auction process will take place to CME intends to engage third party providers to
ensure LCH remains flat risk/cash facilitate an auction and/or transfer mechanism
As of 27th July 2020, €STR replaced EONIA as the PAI rate and discounting rate for all EUR discounted contracts
held EUREX, CME and LCH. As the spread between EONIA and €STR is fixed at 8.5bps, only announced cash
compensation was transferred.
Why will these changes drive an increased Bilateral Negotiation of CSAs?

In addition to the negotiations mandated by the "Margin requirements for non-centrally cleared derivatives"
regulations8 (with the first phase effective 1 st September 2016 and final phase due 1st September 2021), CSA
renegotiations driven by LIBOR transition are expected to be a major exercise. Given the majority of OTC contracts
referencing LIBOR are cleared, there is an expectation that market participants may want to ensure that both
current regulatory mandated and non-mandated bilateral CSAs are in line with CCP discounting and PAI.
The industry has largely been through the transition from using LIBOR to overnight rates for discounting. The
expectation is that the transition from current overnight rates (EONIA, EFFR) to ARRs (€STR, SOFR) will not be as
challenging as the transition from LIBOR to ARR for forecasting. Forecasting changes will be discussed in the next
section.
When will UBS be ready to open CSA negotiations?

UBS commences CSA negotiations after the current CCP transition dates. For CSAs currently referencing EONIA,
UBS opened negotiations to effect the change of PAI to €STR at the end of July 2020. Similarly once the switch
from EFFR to SOFR is completed at the CCPs on the 16th October 2020, UBS aims to open CSA negotiations for
those CSAs referencing EFFR. Please contact your Sales representative directly to start the process.
What is the impact on swaption contracts?

The change in CCPs’ PAI for cleared swaps has a corresponding impact on swaptions that reference the price of
cleared swaps as the underlying instruments. Depending on the extent to which the swaption is in or out of money
changes following on from switch in PAI benchmark, either party of the swaption contract may experience a
significant windfall gain or loss.
In order to recompense market participants for a windfall gain or loss in the price of a swaption due to the change
in the underlying price of cleared swap, both the ECB9 and ARRC10 recommended that market participants should
exchange voluntary compensation with their swaption counterparties.
What is the UBS current stance on swaption voluntary compensation?

UBS agrees in principle with the ARRC's recommendation for industry-wide compensation for the legacy swaption
contracts affected by the discounting transition from EFFR to SOFR and would support an industry-wide
implementation of a process which ensures that the payment of compensation is widespread and includes
counterparties both with net compensation payments and receipts. We are not yet aware of industry formal
working group discussions taking place to determine the mechanics of implementing the Committee's
recommendation, and note that voluntary compensation was not possible in the transition from EONIA to ESTR,
6
https://www.cftc.gov/media/2421/MRAC_LCHSOFRDiscountingLetter090919/download
7
https://www.cmegroup.com/education/articles-and-reports/sofr-price-alignment-and-discounting-proposal.html
8 https://www.bis.org/bcbs/publ/d475.htm
9 https://www.ecb.europa.eu/pub/pdf/other/ecb.recommendation_swaptions_impacted_by_discounting_switch_to_EuroSTR~a64f042ed9.en.pdf
10 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-swaptions-recommendations.pdf
10
however continue to speak to regulators and ISDA on this. If you wish to share your views on the matter, please
contact your sales representative or alternatively, get in touch via UBS-IB-LIBOR@ubs.com.

Below are some of the practical considerations clients should take into consideration for this LIBOR transition

 Discounting rate and interest paid on cash collateral  Review eligible collateral terms in your CSAs
usually aligned (specifically cash interest rate on margin)
 Assess the economic impact of switching your
interest rates
 Switch in discounting rates to ARRs by CCPs is likely  Be mindful that once CCP switches are made, basis
to be a key driver for increased adoption of ARRs risk may exist between your cleared and bilateral
across the industry portfolios
 Consider which CSAs you may need to prioritize
renegotiation for in order to reduce this potential
basis risk
 Any changes to the margin annex for a derivative  A change to the cash margin rate in the agreement
contract should reference the new ARR to replace will result in a change in margin interest flows and
existing cash margin rate. potentially the discounting curve used for the
underlying derivative portfolio
 Consider there may be a value transfer with your
bilateral counterpart for this change that will need to
be agreed
If you have any further questions, in the first instance please contact your sales representative. Alternatively, please
get in touch via UBS-IB-LIBOR@ubs.com.
11
4. LIBOR Transition: Forecasting Risk

What is Forecasting Risk?
LIBOR is widely applied as the floating interest rate benchmark referenced in a derivative (such as a swap floating
leg), coupon on a bond or used to determine the interest rate on a loan. The valuation of such contracts or
securities is driven by the change in the expected value of LIBOR—this is expressed as Forecasting Risk.
Active LIBOR transition is where market participants switch out of LIBOR referenced contracts into ARR referenced
contracts as market liquidity allows, rather than waiting until the end of 2021. This activity would see ARR
forecasting risk gradually replace LIBOR forecasting risk.
The ARR forecasting curve is generally lower than the LIBOR equivalent.
What are the Fallback Provisions?

For any contracts referencing LIBOR when it is discontinued, the parties will, in the absence of changes to the
terms, have to rely on the contractual terms that exist to determine the post-cessation rate. The effectiveness and
prevalence of these fallback provisions varies across products and markets. These provisions, depending on when
drafted, may have the components listed in the following table. Market participants should review existing
derivative contracts and current positions in all LIBOR-referencing financial contracts (that expect to be held beyond
2021) for provisions that determine the reference rate in the absence of LIBOR, or confirm the steps to be taken to
frame an alternative. Various groups (specifically ISDA for derivative contracts) are coordinating inputs from the
industry to arrive at fallback language for impacted financial products addressing permanent LIBOR cessation.
Term Definition
Fallback Fallback language refers to the legal provisions in a contract that apply if the underlying
Language reference rate (e.g. LIBOR) in the product is not published (whether on a temporary or
permanent basis).
Fallback Rate The reference rate replacing LIBOR upon the Fallback Trigger Event. There are multiple
approaches adopted in existing contracts to calculate a fallback rate, including replacing a
floating rate with the last LIBOR setting for all post-cessation fixings or referencing the lenders'
costs of funds.
Spread As noted LIBOR is different to the ARR applicable in each jurisdiction and there may need to be a
Adjustment spread adjustment applied to the ARR replacing LIBOR to account for differences in the
construction of LIBOR and the ARR.
Fallback Set of events relating to the original reference rate which may trigger the fallback to a new
Trigger Event Reference Rate.
Clients should consider the economic and financial impact of the fallback provisions in their own contracts.
12
For example, the Federal Reserve Bank of New York's Alternative Reference Rate Committee has published
language for cash products like securitized products and loans. The Loan Market Association has also focused on
fallbacks for loans. ISDA is due to publish an update to its definitional booklets which incorporate updated fallback
language (known as the IBOR fallback) in Q3 2020.
The preference of the FCA11 is for market participants to pro-actively switch to new alternative ARRs as soon as
possible (as a primary approach), rather than to rely on fallback language (acting, in effect as a ‘seatbelt’).
However, there are various aspects which may hinder this process—for example liquidity in an ARR.
What are some examples of differing fallback methods?

There are different defined triggers and fallbacks for different products. In bonds, for example, a common fallback
in existing documentation is to use the last available published rate. Thus in the event of LIBOR cessation, these
securities would essentially become fixed rate products. In loans, a common ultimate fallback is to lenders' costs of
funds. In a derivative, on the other hand, the alternative to LIBOR may be subject to calculation by agents (e.g. a
dealer poll undertaken by calculation agent or to some other method).
How will the LIBOR transition affect contracts executed under the updated
Definitions?
For OTC derivatives, ISDA has consulted widely on updated Definitions to incorporate fallback language for
implementation in derivative contracts, with the final form due Q3 2020.These changes will become effective for
new contracts traded four months after the publication date. These updated Definitions will include pre-defined
ARR based fallbacks for LIBOR and certain IBOR replacement rates and new trigger definitions.
An alternative approach may be to implement ISDA's Benchmark Supplement 12, which sets out a contractual
process aiming to agree an alternative rate, but does not pre-define the actual rate. The Benchmark Supplement
does not therefore provide economic certainty.
How will the LIBOR transition affect the existing contracts?

ISDA is currently scheduled to publish an IBOR Fallback Protocol in Q3 2020 that when adhered to by market
participants, will apply the updated Definitions to existing derivative contracts. The ISDA Protocol is expected to
be drafted deliberately broad to cover transactions governed by ISDA Master Agreement or other forms of master
agreement (e.g. Federation Bancaire Francaise, Swiss Master Agreement).
If market participants choose not to sign up to protocol or do not adopt the provisions through a bilateral
negotiation then the existing contracts will remain on the current fallback provisions as stipulated in the contract
which when written probably did not envisage a permanent cessation of LIBOR.
ISDA's Benchmark Supplement also provides the option to implement a contractual process for existing contracts.
However, both parties to the contract need to elect to implement for existing contracts for this to take effect.
It is expected that regulated entities such as UBS would adhere to the protocol within 3-4 months of its publication.
It should be noted that even in ARRs where liquidity and volumes are most developed (i.e. SONIA), this is
concentrated in linear derivatives such as swaps. For non-linear derivative contracts there is comparatively little
liquidity and volumes currently e.g.in swaptions where an outright SONIA volatility surface has not yet developed.
With respect to the ISDA IBOR Fallback protocol, reliance on this to achieve LIBOR transition may not provide the
same level of economic certainty for non-linear derivative contracts that it does for linear derivatives. In a
transaction, the replacement of LIBOR references with an ARR plus an adjustment spread may affect the
moneyness of the transaction and affect its efficacy relative to when originally traded as a LIBOR referencing
derivative.
What is expected to happen to cleared contracts?

CCPs have indicated they will look to apply the updated ISDA Definitions for all contracts (new contracts executed
under updated Definitions as well as existing contracts)13.
11 https://www.fca.org.uk/news/speeches/libor-preparing-end
12 https://www.isda.org/book/isda-benchmarks-supplement/
13 https://www.isda.org/a/md6ME/FINAL-Pre-cessation-issues-Consultation.pdf
13
How will the LIBOR transition affect products other than OTC derivatives?
It is hoped that products other than OTC derivatives referencing LIBOR may also include fallback language or other
provisions aimed at easing the transition to the relevant replacement rate as and when industry standards develop.
How could hedge effectiveness across asset classes via linked transactions be
affected by the LIBOR transition?
Differences in fallback methodology across different product types have added more complexity to the transition
for linked transactions. For example the hedge effectiveness of a swap hedging the LIBOR component of a bond or
loan may lose some efficacy upon the triggering of differing fallback methodologies. Market participants may need
to discuss any linked or hedged transactions and evaluate contractual fallbacks in place. The market uncertainty in
entering into new contracts referencing LIBOR beyond 2021 are summarized by the Commodities, Futures Trading
Commission (CFTC)14.
What is the ISDA LIBOR to ARR adjustment?

ISDA has consulted with the industry to determine a market consensus on the methodology used to calculate
the adjustment spread to address the term and credit differences between LIBOR and the ARR and other factors
such as liquidity and fluctuations in supply and demand.
These consultations15 have established that market participants prefer to use the compounded setting in arrears
rate to address differences in tenor between IBORs and overnight RFRs, and the historical median over a five-year
lookback period approach.
Note that Bloomberg has begun to publish these LIBOR fallback rates as per ISDA's agreed methodology as of 21 st
July 2020. The real time data can be accessed via FBAK <GO> on Bloomberg Terminals, and is publicly available on
the Bloomberg website on a delayed basis.
What are the ARRC's recommended best practices?

ARRC published its best practices16 for completing transition from LIBOR to provide date-based guidance, including
when no new LIBOR activity should be conducted.
IT/Operational Target for No New Anticipated Fallback
Hardwired Fallbacks Vendor USD LIBOR (maturing Rates to be selected
Product Incorporated by Readiness beyond 2021) by
Floating Rate 30th June 2020 30th June 2020 31st Dec 2020 6 months before the
Notes first reset/fixing
scheduled after
LIBOR cessation
Business Loans 30th Sept 2020 30th Sept 2020 30th June 2021 6 months before the
first reset/fixing
scheduled after
LIBOR cessation
Consumer Loans Mortgages: Mortgages: Mortgages: Specific consumer
30th June 2020 30th Sept 2020 30th Sept 2020 regulations
Student Loans: 30th
Sept 2020
Securitizations 30th June 2020 31st Dec 2020 CLOs: 30th Sept 2021 6 months before the
Other: 30th June 2021 first reset/fixing
scheduled after
LIBOR cessation
14 https://www.cftc.gov/media/2491/MRAC_IBORDisclosures090919/download.
15 https://www.isda.org/a/WhXTE/Adoption-of-Risk-Free-Rates-Major-Developments-in-2020.pdf
16 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf
14
IT/Operational Target for No New Anticipated Fallback

Hardwired Fallbacks Vendor USD LIBOR (maturing Rates to be selected
Product Incorporated by Readiness beyond 2021) by
Derivatives Up to 4months after Dealers to act to 30th June 2021
IBOR ISDA Protocol deliver a liquid
and New definition SOFR derivatives
are published markets to clients
What is Pre-Cessation?
Cessation and Pre-Cessation Definitions
Terms Definition
Cessation Event Event whereby a reference rate is discontinued or unavailable permanently, triggering
Fallback. A typical LIBOR cessation event would occur if there were no longer sufficient
panel banks contributing to calculation of LIBOR
Pre-Cessation Event An event which impacts the reference rate but does not prevent its publication. With
respect to LIBOR, such an event could be where the FCA deems LIBOR unrepresentative
per IOSCO principles (via EUBR legislation) thus preventing EU regulated market
participants from entering into new contracts referencing LIBOR
ARRC17 recommended the industry to include Pre-Cessation as a Fallback Trigger event in the Fallback Provisions for
Floating Rate Notes.
The forthcoming ISDA Definitions will include both pre-cessation fallbacks (based on a 'non-representativeness'
determination) and permanent cessation fallbacks to apply to all new derivatives referencing LIBOR that incorporate
the amended 2006 ISDA Definitions. For Legacy trades (i.e. those transacted prior to the effective date of the
updated Definitions) these updated Definitions are expected to be incorporated via adherence to the ISDA Fallback
Protocol.
What is 'Synthetic LIBOR'?

On 23rd June HM Treasury18 announced that it intends to bring forward legislation to amend the Benchmarks
Regulation (BMR) to give the FCA enhanced powers. These could help manage and direct an orderly wind-down of
critical benchmarks such as LIBOR. The proposed changes will create a possible way of reducing disruption by
enabling continued publication of a LIBOR rate using different and more robust methodology and inputs.
The legislation would allow the FCA to direct the benchmark administrator to change the methodology, if doing so
would better protect consumers and the integrity of the market than cessation of the rate. By acting via the
administrator, the LIBOR rate (including the screen rates) would be preserved and remain in place.
We will refer to this continued publication of LIBOR under a different methodology as 'Synthetic LIBOR'.
What are the implications of 'Synthetic LIBOR' on Transition?

Regulators still expect the same focus and urgency from market participants to transition from LIBOR by primarily
actively switching from LIBOR contracts into ARR contracts or failing that, to insert robust and workable fallback.
These new powers may allow the continued publication of LIBOR (including the screen rates) with a more robust
methodology and inputs. However the exact format of Synthetic LIBOR is unknown and will be set with market
input. It is expected to be based on some form of ARR and an adjustment spread.
The use of Synthetic LIBOR is also expected to be limited to what the FCA19 term as "Tough Legacy". These are
contracts that have no or inappropriate/unviable alternatives and no realistic ability to be renegotiated or amended.
Also note that any continued publication of LIBOR is dependent on the proposed legislation being passed and that
the FCA will exercise such powers, none of which is certain.
17 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf
18 https://www.fca.org.uk/markets/transition-libor/benchmarks-regulation-proposed-new-powers
19 https://www.fca.org.uk/news/statements/fca-statement-planned-amendments-benchmarks-regulation
15
What has been the reaction to the HM Treasury announcement so far?

Prior to the HM Treasury announcement, the FCA outlined some scenarios to accelerate the transition from LIBOR
to ARRs perhaps to address the counter-active effect that the possibility of LIBOR continuing may have on certain
market participants.
These scenarios include the possibility of a pre-cessation or cessation announcement ahead of end 2021. This
announcement would be in advance of the event or effective data but would have the effect of fixing the
adjustment spread between LIBOR and the corresponding ARR which would apply at either pre-cessation or
cessation date.
The GBP LIBOR market (at time of publication) is pricing such an announcement in early Q1 2021. It is not clear
how such a cessation would fit with the enhanced powers proposed in the HM Treasury announcement.
Why is the Transition challenging for certain products?

Certain contracts which reference LIBOR (including bonds, structured products, securitized products, loans and a
subset of existing contracts) may have characteristics that impede smooth transition such as product mechanics for
material amendments, non-linearity, illiquidity or because they act as hedges to products with different fallback
methods.
Non-Protocol Covered agreements and confirmations may need to be reviewed to determine an approach.
Generally, this approach is likely to involve market participants being requested to sign documentation agreeing to
the transition to the relevant replacement rate.
Why might these Forecasting Risk changes drive increased bilateral/ multilateral
negotiation?
Due to the increased complexity introduced by the differences between asset class fallbacks and product
amendment mechanics, the industry is expected to need to perform a significant review of contractual
documentation before agreeing to change terms on their existing trades. Amendments to existing trades will be a
challenging exercise if market participants have to amend a significant volume of trades across different products
on a bilateral or multilateral basis.
What are the main drivers that may determine the impact on Forecasting Risk?
The level of impact on value and Forecasting Risk will be driven by but not limited to the following:
 The specific legacy reference rate
 Whether term rates become available
 The specific fallback trigger provisions in existing contract(s)
 Fallback rate to include an adjustment required to reflect the credit and term differences agreed by
industry groups
 The maturity of the contract(s)
 The date when changes are expected to happen
 The type of product as there are potentially differing industry solutions
There is no industry consensus on how the change in the value of contracts between parties will be handled.
16

Clients should study existing contracts that reference LIBOR and consider future trading and risk management
requirements and seek professional advice (if applicable) on the economic, legal, and operational implications.
Clients may also consider their specific capital, accounting, and tax consequences of LIBOR transition.
Below are some of the practical considerations clients should take into consideration for this LIBOR transition.
 Increased complexity may be introduced by the  You should perform a review of contractual
differences between asset class fallbacks documentation before agreeing to change terms on
existing trades keeping in mind that current fallback
provisions may create, upon cessation, a fallback to a
rate inconsistent with the economics of the original
deal
 Acknowledge that in any new fallback provisions
that specify an ARR to replace LIBOR, there may be
an adjustment (to address the term and credit
differences)
 Updated ISDA Definitions published Q3 2020  Be aware of the changes required to incorporate the
updated ISDA Definitions for new contracts and the
ISDA IBOR Fallback Protocol for existing trades
 Differences in fallback methodology across different  Identify all transactions which you believe to be
product types may impact hedge effectiveness across linked and evaluate contractual fallbacks in place in
transactions which you believe to be linked order to determine an approach to mitigate potential
differences in fallback methodology across these
transactions
 Evaluation of current contractual fallback provisions  You may be requested to sign documentation
may lead to increased bilateral discussion agreeing to the transition to the relevant
replacement rate or adopt the ISDA Benchmark
Supplement. However the latter is an alternative
path that does not provide certainty of economic
outcome
 Stay up to date with the industry announcements  Categorize your in-scope population of trades in
related to cessation or pre-cessation announcement relation to possible transition activities. Note any
dates as these will fix fallback rates spreads. Also be dependencies you require such as market readiness
aware of how Synthetic LIBOR methodology or internal system/operational development.
develops as some 'Tough Legacy' contracts may end
up referencing this rate
If you have any further questions, in the first instance please contact your sales representative. Alternatively,
please get in touch via UBS-IB-LIBOR@ubs.com.
17
18
5. From 2017 to Date: Regulatory and Market Milestones
18
6. Upcoming Regulatory and Market Milestones

7. Appendix
From 2017 to Date: Regulatory and Market Milestones
Industry/ Impacted
Date Regulatory update Rate Impact
April 2017 SONIA selected as preferred GBP SONIA
ARR
June 2017 ARRC selects SOFR as its SOFR
recommended alternative to USD
LIBOR
July 2017 A. Bailey (FCA) speech on panel LIBOR
banks not being compelled to
submit to LIBOR post 2021
October The National Working Group on SARON
2017 Swiss Franc Reference Rates
recommends SARON as the
alternative to CHF LIBOR
April 2018 SONIA (reformed) begins SONIA Underpinned by £40-50 billion daily transactions. The Bank of
publication England assumes end to end administration; coverage
broadens to include bilaterally negotiated overnight
unsecured transactions and the averaging methodology
changes to reflect a trimmed mean.
April 2018 SOFR published SOFR The Federal Reserve Bank of New York begins publishing
SOFR, which is underpinned by the U.S. Treasury overnight
repurchase (repo) market, for which the pool of eligible
transactions is ~$750 billion per day.
May 2018 CME launches SOFR futures SOFR CME Group launches 1-month and 3-month SOFR futures
contracts.
June 2018 €STR methodology announced €STR
June 2018 First-ever SONIA-based floating SONIA
rate note issued
July 2018 First-ever SOFR-based floating rate SOFR Issuance Size USD 6 billion.
note, issued by Fannie Mae
September €STR recommended as alternative EONIA, Reformed EURIBOR is expected to continue alongside €STR as
2018 EUR ARR & replacement for €STR a multiple rate approach. The European Commission has
EONIA expressed confidence in EURIBOR for the medium term. As
with other LIBORs, EUR LIBOR is expected to cease.
March 2019 ECB WG recommends transition EONIA, ECB WG advises market participants to gradually replace
from EONIA to €STR €STR EONIA with the €STR as a reference rate for all products and
contracts and make all the necessary adjustments for using
the €STR as their standard benchmark.
June 2019 1st FRN Reference Rate switch GBP Associated British Ports becomes first borrow to secure
from GBP LIBOR to SONIA LIBOR, bondholder approval to switch from LIBOR to SONIA.
SONIA
July 2019 EURIBOR authorized under Euribor The Financial Service and Markets Authority (FSMA) of
Benchmarks Regulation Belgium authorize EMMI as administrator of EURIBOR and
hybrid EURIBOR is confirmed as EU benchmark regulation
(BMR) compliant.
20
Industry/ Impacted
Aug 2019 Identifies SORA as the ARR to SOR / ABS-SFEMC issued consultation on 30th August 2019. As
replace SOR SORA SOR is dependent on USD LIBOR, the likely discontinuation of
LIBOR post 2021 impacts future sustainability of SOR.
2nd October EONIA becomes €STR + spread €STR EONIA still available but published as €STR + 8.5bps
2019 (8.5bps) The European Central Bank started publishing €STR from 2
October 2019, reflecting the trading activity of 1 October
2019.
4Q 2019 International Accounting All ARR
Standards Board (IASB) Guidance
January Letter to Senior Managers – Next All LIBOR
2020 steps on LIBOR transition
January UK RFR WG 2020 Top Level GBP
2020 Priorities LIBOR /
SONIA
24th January ARRC Releases Recommendations All ARR
2020 for Interdealer Cross-Currency
Swap Market Conventions
March 6th ARRC Releases a Proposal for New USD
2020 York State Legislation for U.S. LIBOR /
Dollar LIBOR Contracts SOFR
March 2020 Path to GBP
discontinuation of new LIBOR /
GBP LIBOR lending by end Q3 SONIA
2020
March 2020 Statement on bond market SONIA
conventions
25th March Statement on the impact of ALL
2020 coronavirus on firms’ LIBOR LIBOR /
transition plans All ARR
8th April ARRC Announces USD
2020 Recommendation of a Spread LIBOR
Adjustment Methodology for
Cash Products
9th April FINMA send second "Dear CEO" CHF Outlines steps that FINMA expect banks and securities firms
2020 Letter LIBOR / to undertake by end of 2020.
SARON
7th May Draft template for a SARON / SARON /
2020 SOFR Cross Currency Basis Swap SOFR
confirmation
May 2020 Paper on the identification of GBP
Tough Legacy issues LIBOR
26th May Statement regarding Calculation JPY LIBOR QUICK Corp. selected as a calculating and publishing entity
2020 and Publication of Prototype Rates of prototype rates (which are not presumed to be used in
for Term Reference Rates actual transactions) for Term Reference Rates (term structures
based on Japanese yen [JPY] overnight index swap).
27th May ARRC Announces Best Practices USD
2020 for Completing Transition From LIBOR /
LIBOR SOFR
1st June Dear CEOs letter to Major JPY LIBOR

2020 Financial Institutions regarding
LIBOR Transition (BoJ/FSA)
21
Industry/ Impacted
1Q 2020 Decided on Adjusted SOR as SORA
contractual fallback for derivatives
1Q 2020 Published ISDA definition for SORA
compounded SORA
1Q 2020 Established market conventions SORA
for SORA OIS, CCS, SOR-SORA
Basis-Swaps
16th June Recommendation on swaptions EONIA /
2020 affected by the central clearing €STR
counterparties’ discounting
transition from EONIA to the €STR
23rd June HM Treasury 'Tough Legacy' All LIBOR
2020 Guidance
30th June ARRC Announces Further Details USD
2020 Regarding Its Recommendation of LIBOR /
Spread Adjustments for Cash SOFR
Products
30th June ARRC Releases Updated USD
2020 Recommended Hardwired Fallback LIBOR /
Language for Syndicated Loans SOFR
10th July Letter to Authorized Institutions All LIBOR Key Milestones that AIs should endeavor to achieve in the
2020 (AIs) from HKMA / All ARRs transition to ARRs
July 2020 The UK RFR Working Group’s GBP
latest priorities and roadmap for LIBOR /
2020-2021 SONIA
July 2020 Q&A for UK RFR Working Group’s GBP
end-Q3 2020 loans milestone LIBOR /
SONIA
22nd July ISDA letter on IBOR Fallback All LIBOR ISDA expects to facilitate a process whereby regulated entities
2020 protocol / All ARR and other key market participants can adhere to the IBOR
Fallback Protocol ‘in escrow’ prior to the launch date.
22nd July ARRC Releases Conventions SOFR
2020 Related to Using SOFR in Arrears
for Syndicated Loans
27th July LCH, CME & EUREX switch from EONIA, CSA renegotiation to move from EONIA to €STR for
2020 EONIA to €STR for PAI and EUR €STR discounting on EUR to align to cleared contracts.
discounting
3rd August SONIA compounded index SONIA
2020 published
19th August ARRC Updates Best Practices to All LIBOR
2020 Encourage Adherence to ISDA
Protocol During Escrow Period
22
Upcoming Regulatory and Market Milestones
Industry/ Impacted
3Q 2020 Updated ISDA Definitions and All ARR/LIBOR
IBOR Fallback Protocol to
address existing contracts
published
3Q 2020 Loan market conventions GBP LIBOR
proposed (BoE)
3Q 2020 No new USD LIBOR residential USD LIBOR
mortgage maturing after end
of 2021 (ARRC)
3Q 2020 Launch SORA-based bilateral / SORA
syndicated loans
3Q 2020 Pilot SORA retail loans SORA
3Q 2020 Publish guidance on product SORA
conventions
3Q 2020 Publish customer guide on SORA
using compounded-in-arrears,
term rates, fixed rates; Pilot
retail loans
3Q/4Q 2020 Statement on credit spread GBP LIBOR /
methodology for cash & SONIA
successor rates published
(BoE)
4Q 2020 Widespread sign up to the All ARR/LIBOR
ISDA protocol achieved ahead
of effective date (FCA/ARRC)
4Q 2020 Operationally ready to support SONIA
the development & market
making of nonlinear SONIA
derivatives (FCA)
4Q 2020 Progress active conversion of GBP LIBOR
cash products where viable to
reduce legacy volume (BoE)
4Q 2020 Updated ISDA Definitions All ARR/LIBOR Adherence to the Protocol across the client base will require
effective date + 3-4 months client contact and agreement.
from publication
19th LCH, CME & EUREX Group SOFR CSA renegotiation to move from EFFR to SOFR for
October switch from EFFR to SOFR for discounting on USD to align to cleared contracts.
2020 PAI and USD discounting
4Q 2020 Transition to TONA for TONA
standard inter-dealer
derivative trades
4Q 2020 Transition to TONA for JPY LIBOR
standard inter-dealer
derivative trades
4Q 2020 No new USD LIBOR FRNs USD LIBOR
maturing after end of 2021
(ARRC)
23
Industry/ Impacted
4Q 2020 Reduction of CHF LIBOR- CHF LIBOR
based cash products without
fallback or a written
agreement for defining the
alternative reference interest
rate after 2021 (FINMA)
4Q 2020 Introduction of robust fallback CHF LIBOR
clause for new CHF LIBOR-
based cash products expiring
after 2021
4Q 2020 Making markets in SOFR- SOFR
linked interest rate volatility
products
4Q 2020 Amend inter-dealer CSAs to SOFR
use SOFR (ARRC)
1Q 2021 SONIA term rate available SONIA
1Q 2021 Cease new issuance of GBP LIBOR
Sterling LIBOR referencing
products (Bonds &
Securitisations) maturing after
2021
1Q 2021 Cease initiation of new GBP LIBOR
Sterling LIBOR linked linear
derivatives expiring after 2021
(except for risk management
of existing positions) (FCA)
1Q 2021 Accelerate active conversion GBP LIBOR
where to reduce legacy
volume (FCA)
1Q 2021 Complete assessment of all GBP LIBOR
post 2021 cash contracts to
identify those that can be
actively converted (FCA)
1Q 2021 Dealers change market USD LIBOR /
convention quoting from USD SOFR
LIBOR to SOFR (ARRC)
2Q 2021 SGD – Term-SORA expected SORA
2Q 2021 Guidance on cessation date SOR/SORA
for new SOR originations and
transition mechanisms
2Q 2021 No new USD LIBOR business USD LIBOR
loans maturing after end of
2021
2Q 2021 No new USD LIBOR USD LIBOR
securitization maturing after
end of 2021 (except CLOs)
2Q 2021 No new derivatives trades USD LIBOR
maturing end 2021 (ARRC)
24
Industry/ Impacted
Q2/Q3 2021 Cease trading of LIBOR linked GBP LIBOR
non-linear derivatives, and
cross currency derivatives with
a sterling leg, expiring after
2021 (except for risk
management of existing
positions) (FCA)
Q2/Q3 2021 Assess and actively convert GBP LIBOR
where viable (e.g. auction /
compression mechanisms for
derivatives). (FCA)
Q2/Q3 2021 Complete active conversion of GBP LIBOR
cash products. Where active
conversion is not possible for
loans, ensure robust fallbacks
are adopted (FCA)
3Q 2021 No new USD LIBOR CLOs USD LIBOR
(corporate or CRE) (ARRC)
4Q 2021 SOFR forward looking term SOFR
rate expected
4Q 2021 Final recommendations on EURIBOR
EURIBOR fallbacks and related
solutions to amend EURIBOR
legacy contracts
Dec 2021 Assumed cease of LIBOR All
publication
Dec 2021 EONIA ceases to exist EONIA, €STR
Note: Accurate as of time of publication, dates may be subject to change pending further regulatory & industry feedback.
25
Other IBORs Benchmark Rates

The other IBOR benchmark rates are detailed in the below table. .
Jurisdiction Reference Rate Administrator Commentary

Euro Area EURIBOR EMMI The most widely used benchmark of the other IBORs; the
European Commission has expressed confidence in EURIBOR
for the medium term. A new hybrid methodology is in the
process of being implemented.
The ECB RFR WG proposed roadmap20 (published in late
2019) suggests that 2020 work focus are on:
i) EONIA transition to ESTR, particularly on building liquidity

for ESTR and the CCP discounting switch that occurred on
Monday 27 July, and
ii) Development of ESTR-based fallbacks for EURIBOR,
however the final recommendation has been deferred to Q1
2021 due to COVID 19 impact per the May ECB RFR WG
minute.
A list of key milestones and publications can be found from

the ECB RFR WG website21
Japan TIBOR JBA BoJ consultation on JPY Interest Rate Benchmarks:
Following results of 1st Consultation (Integrating Japanese
Yen TIBOR and Euroyen TIBOR), the most likely option as at
30 May 2019, is retaining Japanese Yen TIBOR and
discontinuing Euroyen TIBOR ('retaining Japanese Yen TIBOR').
Australia BBSW ASX RBA22 statement on BBSW: At an ISDA Forum in May 2019,
RBA said BBSW is a robust benchmark that can continue.
Notice advising ASX Market participants that ASX Benchmarks
will deliver a number of external facing enhancements to
BBSW and AONIA, effective 28th October 2019. No cessation
notices.
China SHIBOR NIFC Shanghai No significant notices on cessation or change to
the benchmark noted (further research required).
Hong Kong HIBOR TMA TMA consultation HIBOR ARR: AGM June 2019 - TMA
Confirmed HKD Overnight Index Average (HONIA) as the
alternative reference rate for HIBOR and completed a
consultation on a few technical refinements to HONIA early
this year.
Singapore SIBOR ABS SIBOR discontinuation announcement is expected by end Q4
2020. The ABS is consulting on the discontinuation timelines
and replacement approach.
Note: This information has been sourced from administrator websites and is accurate as of 1st July 2020.
20
https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk-
free_rates/shared/pdf/20191204/2019_12_04_WG_on_euro_RFR_meeting_Item_2_Planning_for_the_WG_H1_2020.pdf
21 https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk-free_rates/html/milestones.en.html
22 https://www.rba.gov.au/speeches/2019/sp-dg-2019-04-11.html
26
Overnight Index Swap Industry Definitions

Terms Definition
Compounding Daily compounding of the ARR (current standard in the Overnight Index Swap market)
Averaging Daily averaging of the ARR
Lockout The rate is taken from a set day for the remainder of the period
E.g. a 4 day lockout period takes the rate on payment day minus 4 and uses this same rate
for the remainder of the term
Backward Shift / The
The rate
The rate used
rate isused
takento
to calculate
from a setaaday
calculate rate for
ratefor each
forthe day
day in
in an
remainder
each interest
anof period
period isis based
the period
interest based on
on the
the rate
rate that
that
Lookback represents
e.g. a 4 daytransactions
represents lockout period
transactions from
from aa prior
takes theday
prior rate on payment day minus 4 and uses this same rate
day
e.g.
for with
E.g.the aa 22 day
remainder
with day shift / lookback
of the
backward termshift /the observation
lookback period starts
the observation and ends
period starts2and
daysends
prior2 to
days
interest period start and end dates
prior to interest period start and end dates
ARR detailed information

Jurisdiction Target ARR Publication Transaction Data Sources Available as of
US Secured Overnight Around 8am EST Tri-Party, General Collateral 3 April 2018
Financing Rate next business day Financing, Bilateral Treasury
(SOFR) repos
UK Sterling Overnight At 9am GMT next Unsecured overnight bilateral 23 April 2018
Index Average business day transactions (reformed)
(SONIA)
Euro Area Euro Short Term At 9am CET next Volume weighted average based 2 October 2019
Rate (€STR) business day exclusively on the eligible data
from the unsecured market
segment of the Money Market
Statistical Reporting to the ECB
Switzerland Swiss Average At 6pm CET same Interbank repo 25 August 2009
Rate Overnight business day
(SARON)
Japan Tokyo Overnight At 10am JST next Money Market brokers 1 November 1997
Average Rate business day
(TONA)
27
8. Bibliography
1 ICE Benchmark Administration Methodology, available athttps://www.theice.com/iba/libor#methodology
2 Impact of the coronavirus on firms’ LIBOR transition plans available at
https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans
3 IOSCO Benchmark Principles, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf
4 Andrew Bailey, The future of LIBOR (July 7, 2017), available at https://www.fca.org.uk/news/speeches/the-
future-of-libor
5 Definition of Price Aligned Interest available at https://www.theotcspace.com/content/price-alignment-
interest-pai
6 LCH SOFR Discounting Letter, available at
https://www.cftc.gov/media/2421/MRAC_LCHSOFRDiscountingLetter090919/download
7 SOFR Discounting and Price Alignment Transition—Proposal for Cleared Swaps, available at
https://www.cmegroup.com/education/articles-and-reports/sofr-price-alignment-and-discounting-
proposal.html
8 "Margin requirements for non-centrally cleared derivatives" regulations available at
https://www.bis.org/bcbs/publ/d475.htm
9 Recommendation by the working group on euro risk free rates – On swaptions affected by the central
clearing counterparties' discounting transition from EONIA for the €STR, available at
https://www.ecb.europa.eu/pub/pdf/other/ecb.recommendation_swaptions_impacted_by_discounting_swi
tch_to_EuroSTR~a64f042ed9.en.pdf
10 ARRC Recommendations for Swaptions Impacted by the CCP Discounting Transition to SOFR available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-swaptions-
recommendations.pdf
11 Andrew Bailey, LIBOR Transition Briefing (July 15. 2019), available at
https://www.fca.org.uk/news/speeches/libor-preparing-end
12 ISDA Benchmark Supplement, available at https://www.isda.org/book/isda-benchmarks-supplement/
13 "CME and LCH have each also communicated to ISDA and regulators that they may elect to consider pre-
cessation triggers for fallbacks if LIBOR was found to be non-representative, even if the 2006 ISDA
Definitions do not include them", available at https://www.isda.org/a/md6ME/FINAL-Pre-cessation-issues-
Consultation.pdf
14 CFTC's Market Risk Advisory Committee approved plain English disclosures for new derivatives referencing
the London Interbank Offered Rate (LIBOR) and other IBORS, available at
https://www.cftc.gov/media/2491/MRAC_IBORDisclosures090919/download.
15 ISDA adoption of risk free rates major developments available at https://www.isda.org/a/WhXTE/Adoption-
of-Risk-Free-Rates-Major-Developments-in-2020.pdf
16 ARRC Recommended Best Practices for Completing the Transition from LIBOR available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf
17 ARRC recommendations on Pre-Cessation in Fallback provisions for FRNs, available at
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf
18 Benchmarks Regulation – proposed new powers – available at https://www.fca.org.uk/markets/transition-
libor/benchmarks-regulation-proposed-new-powers
19 FCA statement on planned amendments to the Benchmarks Regulation available at
https://www.fca.org.uk/news/statements/fca-statement-planned-amendments-benchmarks-regulation
20 The ECB RFR WG proposed roadmap, available at
free_rates/shared/pdf/20191204/2019_12_04_WG_on_euro_RFR_meeting_Item_2_Planning_for_the_WG
_H1_2020.pdf
21 The ECB RFR WG list of key milestones and publications, available at
free_rates/html/milestones.en.html
22 RBA speech to Bloomberg - Progress on Benchmark Reform – 11/04/2019, available at
https://www.rba.gov.au/speeches/2019/sp-dg-2019-04-11.html
28
9. Glossary
Term Definition
€STR Euro Short Term Rate

ARR Alternative Reference Rate
ARRC Alternative Reference Rate Committee
CCP Central Clearing Counterparty
CFTC Commodities, Futures Trading Commission
CME Chicago Mercantile Exchange
CSA Credit Support Annex
EFFR Effective Fed Funds Rate
EMMI European Money Markets Institute
FBF Federation Bancaire Francaise
FCA Financial Conduct Authority
FRBNY Federal Reserve Bank of New York
IBA ICE Benchmark Administration
ICE InterContinental Exchange
IOSCO International Organization of Securities Commissions
ISDA International Swaps and Derivatives Association
LCH London Clearing House
LIBOR London Interbank Offered Rate
OTC Over-the-Counter
PAI Price Aligned Interest
SARON Swiss Average Rate Overnight
SMA Swiss Master Agreement
SOFR Secured Overnight Funding Rate
SONIA Sterling Overnight Index Average
TONA Tokyo Overnight Average Rate
29
10. Disclaimer
These materials are for distribution only under such circumstances as may be permitted by applicable law. They
have not been prepared with regard to the specific investment objectives, financial situation or particular needs of
any specific recipient. They are published solely for informational purposes and are not to be construed as a
solicitation or an offer to buy or sell any securities or related financial instruments or to participate in any particular
trading strategy. Options, derivative products and futures are not suitable for all investors, and trading in these
instruments is considered risky. The recipient should not construe the contents of these materials as legal, tax,
accounting, regulatory, or other specialist or technical advice or services or investment advice or a personal
recommendation.
No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or
reliability of the information contained herein except with respect to information concerning UBS, nor is it intended
to be a complete statement or summary of the securities markets or developments referred to in these materials or
a guarantee that the services described herein comply with all applicable laws, rules and regulations. They should
not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in
these materials are subject to change without notice and may differ or be contrary to opinions expressed by other
business areas or groups of UBS as a result of using different assumptions and criteria. UBS is under no obligation
to update or keep current the information contained herein, and past performance is not necessarily indicative of
future results.
UBS, its directors, officers, employees or clients may have or have had interest or long or short positions in the
securities or other financial instruments referred to herein and may at any time make purchases and/or sales in
them as principal or agent. UBS may act or have acted as market-maker in the securities or other financial
instruments discussed in these materials. Furthermore, UBS may have or have had a relationship with or may
provide or have provided investment banking, capital markets and/or other financial services to the relevant
companies. Neither UBS nor any of its directors, officers, employees or agents accepts any liability for any loss or
damage arising out of the use of all or any part of these materials or reliance upon the information contained
herein. Additional information may be made available upon request. Clients wishing to effect transactions should
contact their local sales representative.
Country-specific information
For further important country-specific information, please see the following link:
https://www.ubs.com/global/en/investment-bank/us-sales-trading-country-specific.html
11. Contact information
If you have any further questions, please contact your sales representative. Alternatively, please get in touch via
UBS-IB-LIBOR@ubs.com.
UBS
5 Broadgate
London, EC2M 2QS
Tel. +44-20 7567 8000
www.ubs.com/libortransition-ib
UBS Europe SE is a subsidiary of UBS AG

LIBOR Transition A Practical Guide August 2020 Edition

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SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.2 - PA BIB.

August 2020 Edition

A practical guide _________________________________________________________________________________ 1

August 2020 Edition ______________________________________________________________________________ 1

1. LIBOR Transition: Executive Summary __________________________________________________ 4

2. LIBOR Transition: Facts and Figures ____________________________________________________ 5

3. LIBOR Transition: Discounting Risk _____________________________________________________ 9

4. LIBOR Transition: Forecasting Risk ____________________________________________________ 12

What are some examples of differing fallback methods? _________________________________ 13

5. From 2017 to Date: Regulatory and Market Milestones ______________________________ 18

6. Upcoming Regulatory and Market Milestones ______________________________________ 19

10. Disclaimer _______________________________________________________________________ 30

11. Contact information _____________________________________________________________ 31

1. LIBOR Transition: Executive Summary

Practical considerations checklist

2. LIBOR Transition: Facts and Figures

Where is LIBOR used?

What is happening to LIBOR and by when?

What has the response been to date?

What are the main Alternative Reference Rates?

How do these ARRs differ to LIBOR?

Components LIBOR ARRs

Are these ARRs secured or unsecured?

Will the ARRs have forward looking term structures?

What are ARR Compounded Index Rates?

What about the other IBOR benchmark Rates?

Summary and Practical Considerations

3. LIBOR Transition: Discounting Risk

What are the implications for CSAs?

How are the CCPs approaching the change?

EFFR->SOFR LCH6 CME7

Why will these changes drive an increased Bilateral Negotiation of CSAs?

When will UBS be ready to open CSA negotiations?

What is the impact on swaption contracts?

What is the UBS current stance on swaption voluntary compensation?

Summary and Practical Considerations

Summary Practical Considerations include

4. LIBOR Transition: Forecasting Risk

What are the Fallback Provisions?

What are some examples of differing fallback methods?

How will the LIBOR transition affect the existing contracts?

What is expected to happen to cleared contracts?

What is the ISDA LIBOR to ARR adjustment?

What are the ARRC's recommended best practices?

IT/Operational Target for No New Anticipated Fallback

What is 'Synthetic LIBOR'?

What are the implications of 'Synthetic LIBOR' on Transition?

What has been the reaction to the HM Treasury announcement so far?

Why is the Transition challenging for certain products?

Summary and Practical Considerations

Summary Practical Considerations include

5. From 2017 to Date: Regulatory and Market Milestones

6. Upcoming Regulatory and Market Milestones

1st June Dear CEOs letter to Major JPY LIBOR

Upcoming Regulatory and Market Milestones

Other IBORs Benchmark Rates

Jurisdiction Reference Rate Administrator Commentary

i) EONIA transition to ESTR, particularly on building liquidity

A list of key milestones and publications can be found from

Overnight Index Swap Industry Definitions

ARR detailed information

€STR Euro Short Term Rate

11. Contact information