Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown

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Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown
Winter 2020

Structured Finance Bulletin
Legal Insights and Trends in the Structured Finance Markets
Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown
James J. Antonopoulos
Christopher J. Brady
Michael P. Gaffney

In this Winter 2020 edition of our Structured Finance Bulletin, we provide updates on recent legal
and regulatory developments in the consumer loan space as well as the latest on the transition
from LIBOR.

We also analyze the Federal Housing Agencies and GSE updates to COVID-19 relief measures for
mortgage loan borrowers and US M&A considerations for Fintech Businesses during the COVID-19

Finally, we review recent Volcker Rule revisions and developments in the EU Securitisation Regulation
and the EU securitization market as a whole and address legal issues in cross-border trade receivable
securitizations and the CFPB QM proposal for the GSE Patch.

Please visit Mayer Brown’s structured finance blog, Retained Interest, designed to provide clients
updates and analysis on legal and regulatory developments impacting the structured finance industry.
Our lawyers provide insights related to developments and innovations in the structured finance
industry and concise and timely briefings on current issues affecting financial asset transactions.

The Consumer Financial Services Review blog provides insights from an industry-leading group of
lawyers within Mayer Brown’s global Financial Services Regulatory & Enforcement practice. For
more than 20 years, the Consumer Financial Services group has been recognized for its thought
leadership and for providing high-caliber regulatory counseling, enforcement defense and
transactional advice to a broad range of consumer financial services providers, including
mortgage and auto lenders, consumer finance companies, payment companies, credit card issuers
and investment banks.

Additionally, we recently launched an IBOR transition blog, Eye on IBOR Transition, designed to
enable our global, cross-practice IBOR Task Force to keep to keep market participants abreast, in
real time, of continuing regulatory and legislative announcements, trade group tools, and the
status of market transition.
Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown
Structured Finance Bulletin
What a Biden Presidency Will Mean for Structured Finance .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 1

SEC Report Underscores the Interconnectedness of the US Residential
Mortgage Credit Markets .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 7

Eye on IBOR Transition .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 13

Federal Housing Agencies and GSEs Provide Relief Measures for
Residential Mortgage Loan Borrowers Negatively Impacted by COVID-19  .  .  .  .  .  .  .  .  .  .  .  .  .  . 23

US M&A During the COVID-19 Pandemic — Considerations for Fintech Businesses .  .  .  .  .  .  .  . 31

Cross-Border Trade Receivables Securitisation — Opportunity Awaits  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 35

CFPB Hatches QM Proposals for the GSE Patch and a Seasoned QM  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 49

Disclosure Technical Standards and Templates Published in Relation to the
EU Securitisation Regulation .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 55

Recommendations for Developing the EU Securitisation Market —
Report by the High Level Forum on Capital Markets Union  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 59

Securitisation after Brexit — Considerations for Securitisations Involving UK Entities .  .  .  .  .  . 65

US Agencies Finalize Revisions to Volcker Rule Covered Funds Provisions .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 69

Volcker Rule Revision Complete — Easing the Compliance Burden for Banks .  .  .  .  .  .  .  .  .  .  .  . 83
Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown
Structured Finance Bulletin - Legal Insights and Trends in the Structured Finance Markets - Mayer Brown
What a Biden Presidency
  Will Mean for Structured Finance
   The authors appreciate the assistance of Jon D. Van Gorp, Carol A. Hitselberger, Paul A. Jorissen,
   Julie A. Gillespie, Stuart M. Litwin, Steven M. Kaplan, Laurence E. Platt and Ryan Suda, partners at
   Mayer Brown.

The implications of the 2020 election for            (or later events occur that shift the Senate
structured finance are coming into focus.            majority to the Democrats), then it is very
Informed by our discussions in Washington, we        likely that Democrats would aggressively
can anticipate the likely direction of federal       use their narrow majorities in Congress,
policy over the next two years that will impact      including to pass substantial tax legislation
the structured finance markets.                      and far-reaching regulatory reforms. The
                                                     course of financial policy over the next
Although former Vice President Joe Biden has
                                                     two years largely hinges on which party
won the U.S. Presidency, the predicted “Blue
                                                     controls the Senate.
Wave” that would have given Democrats control
of both the White House and Congress did not         From a macroeconomic perspective, if the
materialize. Republicans will likely retain the      Republicans hold the Senate, the U.S. would
Senate and unexpectedly gained seats in the          likely continue its current accommodative
House of Representatives, substantially reducing     monetary and fiscal policies, since significant
the Democratic House majority.                       tax increases would be unlikely. The open
                                                     question is the degree to which fiscal policy
If Republicans retain their Senate majority
                                                     will be accommodative going forward.
following the two runoff elections in Georgia
set for January 5th, the absence of unified          With respect to interest rates, a critical factor for
Democratic control will mean that while              structured finance, yields on Treasuries fell when
financial policy will shift in a Biden               the predicted “Blue Wave” failed to materialize,
Administration, that shift will be muted, though     which reduced expectations of the amount of
not insignificant, and will primarily be effected    future borrowing by the federal government,
through presidential and regulatory actions          including for a new COVID-19-related stimulus
rather than legislation. However, it is              package. Indications are that interest rates will
important to note that if Democrats do               remain low for the foreseeable future, which is
win both of the runoff elections in Georgia          generally positive for the demand for consumer

                                                                                                      MAYER BROWN   |   1
loans and ABS/MBS but potentially decreases the        With respect to appointments to the Federal
                   demand for some consumer receivables such as           Reserve Board, President-elect Biden may open up
                   auto leases.                                           a seat if he nominates Fed Governor Lael Brainard
                                                                          to be Treasury Secretary. Another seat is expected

                   A Threshold Matter:                                    to open up in October of next year, when Randy
                                                                          Quarles’s term as Vice Chair ends. The Senate is
                   Personnel is Policy                                    currently considering nominees for the two open
                   The likelihood that the Republicans will retain        seats at the Fed. If those nominees are not
                   their majority in the Senate increases the             confirmed before the end of this Congress, the
                   importance of the Biden Administration’s               Biden Administration will immediately be able to
                   financial regulatory appointments. The Biden           nominate two individuals to the Fed Board.
                   transition team has indicated that President-
                                                                          Federal Deposit Insurance Corporation (“FDIC”)
                   elect Biden’s senior economic team will likely be
                                                                          Chair Jelena McWilliams’s term lasts until 2023,
                   rolled out in December. We expect to see first
                                                                          but because the director of the CFPB and the
                   an announcement of the nominee for Treasury
                                                                          Comptroller of the Currency are members of the
                   Secretary, followed by announcements of the
                                                                          FDIC Board, once President Biden appoints new
                   nominees for Chair of the Securities and
                                                                          leadership to those agencies, a majority of the
                   Exchange Commission, the Commodity
                                                                          FDIC board will consist of Democratic appointees.
                   Futures Trading Commission, and the
                   Comptroller of the Currency.
                                                                          Lame Duck Session:
                   How a Biden Administration will handle the
                   Consumer Financial Protection Bureau (“CFPB”)          Prospects for Stimulus Bill
                   and the Federal Housing Finance Agency                 The most immediate impact of the election in
                   (“FHFA”) is unclear at this time. Those agencies       terms of economic policy, with implications for
                   are led by Trump-appointed directors whose             structured finance, will be on the ongoing
                   terms have not expired, but who, in the case of        negotiations for another stimulus bill to address
                   the CFPB, can be removed at will by the                the continuing impact of the COVID-19
                   President, or, in the case of the FHFA, will be        pandemic. During the lame-duck period (the
                   subject to removal at will by the President if, in a   period between the election and the swearing-in
                   Supreme Court case to be decided early next            of the new Congress in January), Congress will
                   year, the high Court follows its recent precedent      likely seek to pass another stimulus bill. Senate
                   permitting at-will removal of the CFPB director.       Majority Leader Mitch McConnell has said that he
                   Expectations that the Biden Administration             would like to pass a bill by the end of the year.
                   would promptly terminate those directors may           Such legislation would still need to secure House
                   now be tempered by the likely need for the             Speaker Nancy Pelosi’s support, and she has so
                   Biden Administration to work with a Republican-        far insisted that the price tag be north of $2
                   controlled Senate to confirm its nominees.             trillion. Senate Republicans voted in favor of a
                   Nevertheless, expectations are that the Biden          package with a $650 billion price tag in
                   Administration will seek to have a new director        September, but a deal would likely be above that
                   of the CFPB in place as soon as possible.              figure, as the White House has voiced support for

2   |   Structured Finance Bulletin | Winter 2020
a package above $1 trillion. It is possible that    Toomey (R-PA) has already publicly stated that
Congress passes another stimulus bill in the        the Fed’s emergency lending facilities should
lame-duck, but it is not guaranteed.                terminate at the end of the year. If the CARES
                                                    Act funding for the emergency lending facilities
Another stimulus bill would likely build on the
                                                    is not reauthorized, the Fed would be
programs established by the CARES Act and
                                                    prevented from making new loans through its
                                                    emergency lending facilities, though it would
• Reauthorization of the Paycheck Protection        not have to terminate existing loans. The Term
  Program for small businesses (with                Asset-Backed Securities Loan Facility (“TALF”)
  additional restrictions on eligibility and new    that supports structured finance utilizes funds
  requirements for participating banks); and        appropriated in the CARES Act, and would
• Extension of enhanced unemployment                likely be prevented from making new loans if
  benefits at a rate below the $600 per             the CARES Act funding is not reauthorized.
  week provided in the CARES Act.                   If the CARES Act funding is extended and the
The bill could also include:                        economy displays weakness next year, the Biden
                                                    Administration will likely encourage the Fed to
• A new foreclosure moratorium and payment
                                                    modify its underwriting criteria for its Main
  forbearance for federally-backed mortgages,
                                                    Street Lending Program to increase eligibility
  which would impact mortgage servicers, the
                                                    and participation.
  value of MBS, and the residential mortgage
  space more generally;
• A possible eviction moratorium; an                GSE Reform
  eviction moratorium could adversely affect        In the immediate term, the most significant
  Single-Family Rental securitizations;             reform on the horizon for structured finance is the
• An extension of funding for Federal Reserve       Trump Administration’s current effort to end the
  emergency lending facilities (see below);         decades-old conservatorships of Fannie Mae and
                                                    Freddie Mac (the “GSEs”). The Biden team has
• Funding for state and local government,
                                                    not indicated its policy views on the future of the
  though in a far smaller amount than the
                                                    GSEs. However, FHFA Director Mark Calabria has
  $1 trillion sought by Speaker Pelosi; and
                                                    signaled his intention to finalize a new capital rule
• A liability shield for COVID-19 pandemic-
                                                    for the GSEs before the end of the year. Once
  related lawsuits.
                                                    that rule is finalized, or possibly beforehand, he is
                                                    expected to announce how he intends to
The Future of TALF and                              proceed with terminating the conservatorships.
Other Federal Reserve                               Director Calabria has indicated that the
                                                    conservatorships could be terminated with an
Emergency Credit Facilities                         interim step being that the GSEs would operate
The funding authorized by the CARES Act for         under a consent order while raising capital.
the Federal Reserve’s emergency lending
                                                    It is important to note that the Supreme Court is
facilities expires at the end of the year. Likely
                                                    hearing a case next month about the validity of
incoming Senate Banking Committee Chair Pat

                                                                                                     MAYER BROWN   |   3
the Third Amendment to the Preferred Stock              A Republican-controlled Senate and a closely
                   Purchase Agreement between Treasury and                 divided House would very likely prevent the
                   FHFA, through which Treasury provides fiscal            passage of legislation that would:
                   support for the GSEs. If the Supreme Court signals
                                                                           • Enact major housing finance reform
                   at its oral argument next month that it may
                                                                             impacting the residential mortgage space
                   invalidate the Third Amendment when it issues its
                                                                             and related securitization products;
                   decision, likely in March or April, it may compel the
                   FHFA and the Treasury Department to proceed             • Use the Congressional Review Act to
                   more quickly with reform. Alternatively, it is            invalidate regulations adopted by the
                   possible that the Biden Treasury Department will          Trump Administration since May of 2020
                   seek to halt the reform efforts upon taking office.       (the statutory timeframe in which the CRA
                                                                             can be used with respect to a regulation);
                                                                             the regulations exposed to reversal under
                   Legislative Possibilities                                 the CRA include the recent revisions to the
                   Limited – IF Republicans Keep                             Volcker Rule, including changes paving the
                                                                             way for liberalization of certain investment
                   the Majority in the Senate                                restrictions in CLOs that bank investors in
                   While significant legislation is always a possibility     many such vehicles had required in order
                   if there is a major event that galvanizes public          to comply with the previous version of the
                   support for a legislative response (such as the           Volcker Rule;
                   2001-2002 accounting scandals that prompted
                                                                           • Impose substantial tax increases;
                   Congress to pass the Sarbanes-Oxley Act), we
                                                                           • Establish interest rate caps on
                   anticipate that the votes will not exist for
                                                                             non-residential consumer lending; or
                   dramatic financial regulatory reform if the
                   Republicans retain the Senate majority.                 • Enact the “Green New Deal” or other
                                                                             environmental legislation that greatly
                   That said, we would still expect Congress to be           expands corporate legal liability.
                   active next year, as is the case during the first
                                                                           Again, it is important to emphasize that
                   year of any presidency. Legislation could include
                                                                           if Democrats win both of the Georgia Senate
                   the following areas affecting structured finance at
                                                                           seats on January 5th (or other unanticipated
                   least indirectly:
                                                                           events flip control to the Democrats), we
                   • Infrastructure legislation, as the Highway            would expect that Democrats would then
                     Trust Fund expires in September of 2021,              aggressively use their legislative majorities
                     requiring reauthorization and providing a             - as narrow as they would be - to potentially
                     vehicle for a substantial infrastructure bill;        pass some of the above items, in particular
                   • Additional funding for renewable energy               substantial tax reform and far-reaching
                     research and production (including solar,             environmental legislation, and a Senate
                     which could increase the supply of solar-             rule change to eliminate the filibuster.
                     loan-backed ABS); and                                 Again - a lot of financial policy that could
                                                                           impact structured finance hinges on the
                   • Additional subsidies for electrical vehicle
                                                                           narrow margin of control in the Senate.
                     purchases and charging stations.

4   |   Structured Finance Bulletin | Winter 2020
Given the substantial federal deficit and soaring     regulatory weaknesses in the non-bank sector that
debt-to-GDP ratio, the Biden Administration           have surfaced in the wake of the COVID-19
also is likely to examine how to place the            economic shock. They have focused on the need
federal government’s finances on a more               to re-examine the regulation of securities dealers,
sustainable footing, including by reversing the       in particular primary dealers, and non-bank
Trump tax cuts. It will be extremely difficult to     mortgage lenders and servicers due to the
adopt substantial budget reforms on both the          continued movement of the mortgage credit
revenue and spending sides given the likely           market away from banks. This push for reform is
divided control of Congress and sharp divides         likely to extend beyond the Trump Administration
in the Democratic caucus in Congress.                 and set the stage for the Biden Administration to
Nevertheless, we expect that the Biden                pursue new regulation that could have a
Administration will seek to include targeted tax      substantial impact on structured finance.
increases (including raising the corporate and
                                                      One option for reforming non-bank finance
capital gains rates and treating carried interest
                                                      would be for the Financial Stability Oversight
as ordinary income) as part of future budget
                                                      Council (“FSOC”) to designate large non-bank
deals with Senate Republicans.
                                                      companies for enhanced prudential supervision
                                                      by the Federal Reserve and/or to determine that
Executive Branch                                      lending or other activities by non-bank

Regulatory Reforms                                    companies should be subject to additional
                                                      regulation or a new statutory regime.
An inability to pass significant financial services
legislation if Republicans retain the Senate          Biden appointees to financial regulatory agencies
majority will likely force the Biden Administration   are likely to consider implementing a wide range
to implement its financial service policy agenda      of other rules that would impact structured
through existing presidential and regulatory          finance, including:
authorities. President-elect Biden is expected to
                                                      • Reforms to the Volcker Rule to limit bank
revoke many of the Trump Administration’s
                                                        exposures to structured finance risks, either
executive orders and issue a series of new
                                                        through supervision or modifications to the
orders that set policy for his Administration.
                                                        recently finalized rules (Fed Governor Brainard
Although the president does not have
                                                        voted against the recently finalized Volcker
substantial authority to change financial
                                                        changes, signaling that she may want to revisit
regulatory policy through executive orders, the
                                                        the rules at a later date);
issuance of executive orders will signal the
                                                      • New capital and liquidity requirements for
direction of policy under a Biden Administration.
                                                        non-bank mortgage companies;
The groundwork for reform by financial regulators     • Reforms of the Treasury market, including
that could impact structured finance has already        potentially creating a central clearinghouse
begun. Federal Reserve Vice Chair for Supervision       for Treasury securities;
and current Chair of the Financial Stability Board
                                                      • Relief with respect to Federal Direct Student
Randy Quarles and SEC Chair Jay Clayton have
                                                        Loans and FFELP student loans, including
signaled that reforms are likely needed to address
                                                        forbearance and forgiveness with respect

                                                                                                     MAYER BROWN   |   5
to loans owned or guaranteed by the             enforcement actions on the following areas of
                       Department of Education;                        relevance to structured finance markets:
                   • Reversal of the True Lender/Valid-When-           • Fair lending;
                     Made regulations issued by the Comptroller
                                                                       • Student loan and mortgage servicing
                     of the Currency and the FDIC;
                   • Stronger oversight of consumer lending
                                                                       • Unfair, deceptive, or abusive consumer
                     (including credit cards);
                                                                         lending (especially auto loans, non-bank
                   • Credit score and credit bureau reforms;             lending, student loans, and credit cards);
                   • Environmental, social and governance (“ESG”)      • Debt collection practices;
                     requirements for public companies and
                                                                       • Consumer and investor protections, with
                     government contractors; and
                                                                         larger penalties and less credit for
                   • Capital charges or other supervisory                self-reporting and cooperating with
                     restrictions on banks financing                     regulators upon the discovery of a violation;
                     carbon-energy-intensive businesses or carbon-       and
                     energy-producing businesses.
                                                                       • Stricter application of antitrust laws, especially
                                                                         with respect to larger financial institutions.
                   Enforcement                                         For more information, please do not hesitate to
                   The Biden Administration will also likely use       contact us or any of the other listed Mayer
                   enforcement to advance its policy agenda due        Brown contacts. Mayer Brown continues to
                   to both the difficulty of passing legislation and   monitor developments relevant to structured
                   the discretion afforded to craft remedies. The      finance as the Biden transition team identifies
                   Department of Justice and financial regulators      senior personnel, and as the incoming Biden
                   (including in coordination with state regulators    Administration and Congress signal their policy
                   and attorneys general) will likely focus            priorities for the coming weeks and next year. n

6   |   Structured Finance Bulletin | Winter 2020
SEC Report Underscores the
  Interconnectedness of the US
  Residential Mortgage Credit Markets
   ANDREW OLMEM                                       ANNA T. PINEDO
   LAURENCE E. PLATT                                  JON D. VAN GORP

When John Donne wrote the famous book, No          other consumer lending markets and (vi) the
Man is an Island, he most certainly wasn’t         commercial mortgage markets. With respect to
thinking about residential mortgage credit. But    each of these markets, the report examines
the idea of interconnectedness has universal       COVID-19-induced stresses of different types,
applicability and lies at the heart of the SEC’s   which fall into three categories.
newly released report titled “U.S. Credit
                                                   • Short-term funding stresses: These are stresses
Markets Interconnectedness and the Effects of
                                                     caused by a sudden and immediate demand
the Covid-19 Economic Shock.” This report,
                                                     for liquidity in the short-term funding markets.
issued on October 14, 2020, describes in detail
the stresses experienced by the credit markets     • Markets structure/liquidity-driven stresses:
immediately following the shutdown of the US         These are stresses caused by an elevated
economy in early March 2020 in response to           demand for financial intermediation in the
COVID-19. The report is thorough and data            context of constrained capital and risk
driven. It identifies a cohort of approximately      limits. Liquidity constraints were a limiting
$54 trillion of credit issued and outstanding in     factor in the volume of trades that regulated
the US financial system at the end of 2019 and       intermediaries (specifically broker-dealers)
traces the flow of that credit through various       could undertake when trading volumes
intermediaries during the period of time studied     spiked during the initial COVID-19 shutdown
by the report. The data in the report supports a     hindering their ability to be a countercyclical
widely-held view that credit markets are             force in the market.
interdependent, directly linked through a myriad   • Long-term credit stresses: These are longer-
of complex, interconnected transactions.             term stresses from COVID-19, which may still
                                                     be unfolding. Examples are building stress in
The report studies several different markets to
                                                     the commercial real estate and leveraged loan
illustrate their level of interconnectedness,
                                                     markets. The health of financial intermediaries,
namely, (i) short-term funding markets, (ii)
                                                     which have significant holdings of these
corporate bond markets, (iii) leveraged loans
                                                     assets, will be highly correlated to the ultimate
and CLO markets, (iv) municipal securities
                                                     performance of these assets.
markets, (v) residential mortgage markets and

                                                                                                  MAYER BROWN   |   7
For this alert, we have chosen to focus on the       changes in the value of highly leveraged credit-
                   aspects of the report that discuss the residential   linked securities, or “CRT,” which are owned by
                   mortgage credit markets.                             many mortgage REITs, were directly correlated
                                                                        to the negative performance of the mortgage

                   A. Changes in the                                    credit markets, potentially increasing the
                                                                        severity of the stress experienced by the
                   Mortgage Credit Markets                              mortgage credit markets in March 2020.
                   As many of us who observe the residential
                   mortgage credit markets know, the early days         B. COVID-19 as a
                   of the March 2020 COVID-19 lockdown
                   produced tremendous challenges for non-bank          Triggering Event
                   entities that owned residential mortgage credit      In the early days of the COVID-19 crisis, the lack
                   in the form of securities and loans and that         of certainty about future economic conditions
                   depended on short-term funding to finance            and the scattered consumer payment relief policy
                   their assets. Mortgage REITs were impacted           initiatives among federal, state and local
                   heavily by these market conditions, but so were      regulators that were often in conflict with one
                   non-bank mortgage originators and private            another drove severe and sharp declines in the
                   credit funds, which originate and invest in          value of mortgage credit assets. In an effort to
                   residential mortgage credit.                         deliver assistance to US consumers who were
                                                                        increasingly losing their jobs and being
                   The SEC report highlights the evolution of the
                                                                        furloughed as employers scaled back or shut
                   non-bank mortgage intermediaries as a key
                                                                        down operations, the federal government and
                   reason for the COVID-19-related stress in the
                                                                        state governments announced legally mandated
                   mortgage credit markets. Currently, 70% of
                                                                        forbearance periods for the enforcement of
                   mortgage loans are originated by non-bank
                                                                        residential mortgage loans. These legislative
                   mortgage originators. While banks have access
                                                                        initiatives and executive orders were intended to
                   to liquidity from deposits to fund their mortgage
                                                                        bring quick and immediate relief to affected
                   origination activities, non-bank mortgage
                                                                        borrowers, providing very few hurdles for
                   originators do not have that source of liquidity
                                                                        borrowers seeking relief to qualify for the various
                   and, therefore, must depend on the short-term
                                                                        forbearance programs. As a result, anticipated
                   repo markets for funding. Similarly, mortgage
                                                                        and actual mortgage delinquencies increased
                   credit assets are increasingly held by mortgage
                                                                        quickly, causing the mark-down of mortgage
                   REITs, which grew significantly after the 2008
                                                                        credit assets. At about the same time, the Federal
                   subprime credit crisis from $168 billion in assets
                                                                        Reserve restarted a quantitative easing program
                   in 2009 to almost $700 billion in assets in 2019.
                                                                        to deliver stimulus to the economy and increase
                   The concentration of mortgage credit assets in
                                                                        liquidity to the credit markets during a time of
                   the hands of mortgage REITs and other entities
                                                                        sudden need. Many of the bond purchasing
                   that depend on short-term repo funding to fund
                                                                        programs created in the 2008 subprime credit
                   long-term assets exacerbated the impact of the
                                                                        crisis were reactivated, increasing demand for
                   COVID-19 shocks in the mortgage credit
                                                                        credit securities and, therefore, rapidly raising
                   markets. The SEC report also points out that
                                                                        prices for those securities, including

8   |   Structured Finance Bulletin | Winter 2020
mortgage-backed securities issued or guaranteed      of the COVID-19-related forbearance initiatives.
by the Government Sponsored Enterprises              For margin calls made and enforced, the credit
(“GSEs”) Fannie Mae and Freddie Mac, as well         impact of the write-downs created a negative
as by Ginnie Mae (collectively, “Agency MBS”).       feedback loop; as holders of mortgage credit
                                                     sold securities and loans into an illiquid market
Along with mortgage REITs, the non-bank
                                                     to meet margin calls, they drove prices lower,
residential mortgage loan originators immediately
                                                     increasing the margin calls. The SEC report
felt the impact of these two events. Mortgage
                                                     acknowledges this phenomenon and attributes
loans made and held in inventory by non-bank
                                                     additional stress to the lack of buyers in the
mortgage originators pending securitization or
                                                     Agency MBS market. Agency MBS buyers and
delivery to GSEs were marked down by the
                                                     market-makers are predominantly broker-
lenders that financed those loans on short-term
                                                     dealers. However, the SEC report suggests that
repo facilities, triggering margin calls. When the
                                                     liquidity requirements, among other
Federal Reserve bond buying programs were
                                                     constraints, limited their trading capacity and
resurrected causing prices of Agency MBS to rise
                                                     their capacity to build inventories, which
rapidly, hedging arrangements used by these
                                                     significantly undermined their ability to serve as
non-bank mortgage originators to hedge their
                                                     market-makers at a time when large quantities
pipeline of mortgage loans immediately dropped
                                                     of mortgage credit assets were being sold into
in value. This produced a separate set of margin
                                                     the market. This is why the Federal Reserve’s
calls that, when combined with the margin calls on
                                                     bond buying program was so important, even
the short-term warehouse facilities for mortgage
                                                     though it caused short-term stress on the
loans, produced a sudden liquidity crisis for the
                                                     non-bank mortgage originators that hedged
non-bank mortgage originators.
                                                     their pipelines of mortgage loans.
Requests for relief, although reasonable, were
                                                     Interestingly, the SEC report only gives passing
difficult for repo lenders and hedge
                                                     mention to non-bank residential mortgage
counterparties to grant, because they, too,
                                                     servicers, which have a unique role in the
were experiencing similar margin calls or
                                                     mortgage markets. Not only are they tasked
write-downs of mortgage credit positions on
                                                     with the responsibility of processing mortgage
their books, illustrating the interconnectedness
                                                     payments and working out COVID-19-related
of the mortgage credit markets. Although
                                                     forbearance plans with borrowers, they are also
broker-dealers, for example, were sympathetic
                                                     mortgage credit holders to the extent that they
to non-bank mortgage originators’ requests for
                                                     own mortgage servicing rights and fund
more time to meet margin calls on hedging
                                                     mortgage servicing advances. This is an
arrangements, they were unable to grant the
                                                     interesting dynamic not replicated in other
requested extensions because of
                                                     service industries. Mortgage servicers must not
corresponding and interconnected transactions
                                                     only be excellent operators, but they must also
they had entered into. Similarly, mortgage
                                                     be astute financial managers. Mortgage
REITs, facing margin calls, tried to convince
                                                     servicing rights represent the right to a fixed
their repo lenders to forego or reduce margin
                                                     payment on each mortgage loan in a pool of
calls until the mortgage credit markets were
                                                     serviced mortgage loans. This right to payment
able to reach more certainty on the true impact

                                                                                                   MAYER BROWN   |   9
is in excess of the cost of servicing and,         financial markets and, as a result, the
                   therefore, has value and trades in the market.     exponential impact that a shock like COVID-19
                   Because mortgage servicers don’t receive           can have throughout the system. The credit
                   payment of this amount on delinquent loans but     markets are analogous to a collection of
                   are still required to service them, the value of   interconnected circuits that may individually
                   mortgage servicing rights can drop severely in     function but can produce an overall system
                   anticipation of a long period of elevated          failure if one or more of the circuits in the system
                   mortgage delinquency. An expectation of            malfunction. This result is magnified from the
                   elevated delinquencies that reduces the value of   2008 subprime credit crisis because of changes
                   mortgage servicing rights can produce liquidity    in the size, structure and function of the US
                   strains for servicers, many of which depend on     credit markets, which now depend more heavily
                   short-term funding arrangements to finance         on non-bank owners of credit and financial
                   their ownership of mortgage servicing rights.      intermediaries. This is particularly true for the
                                                                      mortgage credit markets. The SEC report notes
                   Similarly, mortgage servicers are responsible
                                                                      that, as of August 20, 2020, 7.4% of residential
                   for making advances of principal, interest,
                                                                      mortgage loans were in forbearance (although
                   taxes, insurance and other payments on
                                                                      this percentage has been dropping recently) and
                   delinquent mortgage loans in order to keep
                                                                      concludes that, if mortgage delinquencies
                   MBS payments current and to protect the
                                                                      increase from that level going forward (which
                   related mortgaged properties from losses and
                                                                      could happen as government support programs
                   claims. These advancing obligations generally
                                                                      for small business, in particular, expire), it would
                   are first supported by prepayments on other
                                                                      escalate the financial stress for non-bank
                   mortgage loans in the pool of serviced
                                                                      mortgage originators, owners of mortgage
                   mortgage loans for principal and interest
                                                                      credit assets and non-bank mortgage servicers,
                   advances, but, to the extent that prepayments
                                                                      and that stress would flow through the financial
                   are insufficient to fund the monthly payments
                                                                      system given its interconnectivity.
                   on delinquent mortgage loans, the mortgage
                   servicer must come out-of-pocket or turn to        The SEC report is rightly complementary of the
                   third-party financing sources to fund advances.    bond buying programs restarted by the Federal
                   Funding advances on Agency MBS with third-         Reserve to mute the impact of the stress in the
                   party lenders is especially complicated,           credit markets, particularly the short-term
                   requiring the cooperation of the GSEs.             funding markets. The report identifies
                                                                      securitization as a strength of the mortgage

                   C. Conclusions of the                              credit markets because it eliminates the
                                                                      mark-to-market and extension risk of short-term
                   SEC Report and Possible                            repo funding. This is an accurate observation,
                   Solutions                                          but it only holds true to the extent that those
                                                                      mortgage-backed securities (“MBS”) are not
                   The SEC report does not propose solutions to
                                                                      themselves funded with short-term repo
                   these past, present and emerging problems. It
                                                                      financing, which is how most non-bank holders
                   was not written to do so. It was intended to
                                                                      of MBS, such as mortgage REITs and credit
                   demonstrate the interconnectivity of the
                                                                      funds, finance their holdings of MBS.

10   |   Structured Finance Bulletin | Winter 2020
Bond buying programs and other similar              financial obligations that go along with mortgage
measures that add liquidity to the                  servicing, namely, owning mortgage servicing
interconnected credit markets when it is most       rights and making advances for delinquent loans.
needed are an effective way to address              Creating and developing coordinated
temporary market dislocations of the type           government crisis support programs to help
experienced shortly after the COVID-19              non-bank mortgage servicers fund mortgage
shutdown. Situational problems require              servicing rights and advances is necessary for the
situational solutions, such as the bond buying      stable and proper functioning of the residential
programs, that can be easily calibrated to the      mortgage credit markets going forward,
duration and severity of the problem.               particularly following an economic shock similar
Unimaginative and inflexible solutions, like        to COVID-19. Expecting the banks to jump back
imposing leverage limits on mortgage REITs, for     in to pick up the slack, absent significant
example, are attractive in theory but not ideal.    regulatory reforms, doesn’t account for their
They are blunt tools that may prevent future        regulatory capital impediments to holding
liquidity challenges, but, at the same time, they   mortgage servicing rights and their general
may unintentionally stunt the growth of the         hesitation to own them again as a result of the
mortgage credit markets at a time when banks        losses and reputation or harm they suffered from
have exited the markets and non-bank capacity       the asset during the 2008 subprime credit crisis.
is needed to support consumer demand.
                                                    We applaud the SEC’s effort to put the data out
We think, however, the role the non-bank            in a comprehensive report and expect that this
mortgage servicers play in the mortgage credit      first step will lead to further action toward
market was underplayed by this report. These are    mitigating the effects of a future economic
the entities tasked with the frontline work of      shock similar to COVID-19. The report
collecting payments and working out forbearance     intentionally leaves its readers with the open
plans with affected consumers, but, at the same     question of how contingency plans should be
time, they do not get paid for this work, because   made for future events given the changing
servicing fees are not paid on delinquent,          nature of the credit markets and the increasing
non-remitting mortgage loans. Non-bank              participation by non-bank intermediaries. Over
mortgage servicers now make up more than half       the coming weeks and months, we expect that
of the mortgage servicing market, which is a        market observers, regulators, including the
significant change from the 2008 subprime           Financial Stability Oversight Council, and
mortgage crisis. Non-bank mortgage servicers        participants will attempt to answer these and
use the mortgage credit markets to fund the         other questions posed by the report. n

                                                                                                 MAYER BROWN   |   11
12   |   Structured Finance Bulletin | Winter 2020
Eye On IBOR Transition

With December 31, 2021, in plain sight, preparation        Authority (“FCA”) that a particular LIBOR no
for the transition from the London Interbank               longer is representative of its underlying market.
Offered Rate (“LIBOR”) and similar interbank               ISDA reports that during the two-week period
offered rates (“IBORs”) to replacement benchmark           prior to official launch of the Protocol, 257
interest rates is accelerating rapidly. In this article,   market participants elected to adhere to it.
we explore a number of recent core developments
                                                           Supplement No. 70 to the 2006 ISDA
affecting structured finance products.
                                                           Definitions,3 which also takes effect on January
                                                           25, 2021, amends ISDA’s standard definitions to
ISDA IBOR Fallbacks Protocol                               incorporate appropriate fallbacks for GBP (United

and Supplement                                             Kingdom), CHF (Switzerland), USD (United
                                                           States), EUR (Europe) and JPY (Japan) LIBOR, as
The International Swaps and Derivatives
                                                           well as EURIBOR (Europe), TIBOR (Japan), BBSW
Association (“ISDA”) launched the long-awaited
                                                           (Australia), CDOR (Canada), HIBOR (Hong Kong),
IBOR Fallbacks Protocol and related IBOR
                                                           SOR (Singapore) and THBFIX (Thailand). These
Fallbacks Supplement on October 23, 2020.1
                                                           fallback rates are deemed robust and follow the
The IBOR Fallbacks Protocol2 allows market                 recommendations of applicable governmental
participants that choose to adhere to it to                working groups. They will apply to new cleared
incorporate fallback language into existing                and non-cleared interest rate derivatives that
non-cleared derivatives with no further action.            reference the 2006 Definitions from the effective
Derivatives contracts involving a counterparty             date. The Supplement also addresses the
that has not adhered to the Protocol will require          treatment of discontinued rate maturities.
a bilateral amendment to address IBOR
cessation. The fallbacks in the Protocol apply             ARRC Recommendations
upon a permanent cessation of an applicable
IBOR. In addition, for LIBOR only, the fallback            and Resources
will become operative upon the occurrence of a             The US Alternative Reference Rates Committee
pre-cessation trigger; that is, upon a                     (the “ARRC”), convened by the Federal Reserve
determination by the UK Financial Conduct                  Board and New York Federal Reserve Bank, has

                                                                                                      MAYER BROWN   |   13
been very active in producing tools, across          prudential banking regulators reiterated that
                   numerous product categories, to ease the             banks should choose a robust replacement rate
                   transition from LIBOR to its recommended             that is appropriate for their needs and include
                   replacement: the Secured Overnight Financing         fallback language in their loan agreements
                   Rate (“SOFR”).                                       providing for the use of such chosen rate if
                                                                        LIBOR were to be discontinued.
                   ADJUSTMENT                                           BEST PRACTICES
                   After conducting product-specific consultations,     To assist market participants in preparing for
                   and refreshing its loan recommendations based        LIBOR cessation, the ARRC released a set of
                   on market evolution, the ARRC has produced           recommended best practices in May 2020,
                   final recommendations for key product                which it updated in September.6 Included in
                   categories that incorporate a “hardwired”            these best practices are timelines and
                   approach to LIBOR fallback rate language. While      intermediate steps that market participants
                   the rate waterfall within the hardwired approach     should consider to accelerate their transition to
                   varies somewhat by product,4 the essence of          a replacement benchmark interest rate. Key
                   falling back to Term SOFR is constant.               recommendations include:

                   Separately, the ARRC published its                   • New USD LIBOR cash products should include
                   recommendation for a spread adjustment to              ARRC-recommended (or substantially similar)
                   recognize the difference between LIBOR and             fallback language as soon as possible;
                   SOFR resulting from the fact that SOFR is a          • Institutions should implement clear and
                   secured rate while LIBOR is not. In response to        rigorous internal programs to assess and
                   global market preference to align product              address their LIBOR exposure across all
                   fallbacks with potentially linked derivative           relevant activities;
                   product fallbacks, the ARRC’s recommendation
                                                                        • Third-party technology and operations
                   mirrors that of ISDA: a spread adjustment
                                                                          vendors relevant to the transition should
                   methodology based on a historical median over
                                                                          complete all necessary enhancements to
                   a five-year lookback period calculating the
                                                                          support SOFR by the end of 2020;
                   difference between USD LIBOR and SOFR.
                                                                        • For contracts specifying that a party will select
                   It should be noted that many financial                 a replacement rate at their discretion following
                   institutions still are considering whether SOFR is     a LIBOR transition event, the determining party
                   the appropriate fallback rate for them based on        should disclose their planned selection to
                   their funding models and loan activity                 relevant parties at least six months prior to the
                   structures, and specifically whether a more            date that a replacement rate would become
                   credit-sensitive rate might be more suitable. For      effective; and
                   the structured finance market, there would be
                                                                        • New use of USD LIBOR should stop, with
                   obvious implications for securitization and
                                                                          timing depending on specific circumstances
                   hedged transactions that are SOFR-based. In a
                                                                          in each cash product market.
                   statement5 released on November 6, 2020, US

14   |   Structured Finance Bulletin | Winter 2020
The following table shows the ARRC’s recommended target end dates by product:

                             Hardwired               Tech / Ops              Target For
                                                                                                     Anticipated Fallback
      Product                Fallbacks                 Vendor             Cessation Of New
                                                                                                      Rates Chosen By
                          Incorporated By           Readiness By          Use Of Usd Libor
                                                                                                    6 months prior to
                        6/30/2020                 6/30/2020             12/31/2020                  reset after LIBOR’s
 Rate Notes
                        9/30/2020                                                                   6 months prior to
 Business Loans                                   9/30/2020             6/30/2021                   reset after LIBOR’s
                        Bilateral:                                                                  end
                        6/30/2020                                                                   In accordance with
 Consumer                                         Mortgages:            Mortgages:
                                                                                                    relevant consumer
 Loans                  Student Loans:            9/30/2020             9/30/2020*
                                                                                                    6 months prior to
                                                                        CLOs: 9/30/2021
 Securitizations        6/30/2020                 12/31/2020                                        reset after LIBOR’s
                                                                        Other: 6/30/2021
                                                  Dealers to
                        Not later than
                                                  take steps
                        3-4 months after
                                                  to provide
                        the Amendments
 Derivatives                                      liquid SOFR           6/30/2021
                        to ISDA 2006
                        Definitions are
                                                  markets to
* The September 30, 2020, date for consumer loans refers to new applications for closed–end residential mortgages using USD
  LIBOR and maturing after 2021.

As this article is published, on November 30, ICE                these was published in 2019 and related to
Benchmark Administration (“IBA”) has announced                   floating rate notes (“FRNs”),7 which present a
that it will consult in early December on its                    particularly thorny transition issue because,
intention to cease the publication of the one-                   with their widely held market (and like many
week and two-month USD LIBOR settings after                      structured finance products), they are so
December 31, 2021, and to cease publishing the                   difficult to amend. These were followed by
remaining USD LIBOR settings after June 30,                      recommended cross-currency swaps
2023. The effect of this announcement (which has                 conventions in January 2020,8 syndicated loan
been well received by global regulators), if any,                “in arrears” conventions in July 2020,9 and
on the ARRC’s Best Practices timeline                            bilateral loan “in arrears” conventions in
summarized above has not been determined.                        November 2020.10

                                                                 The FRN conventions identify considerations for
                                                                 market participants interested in using SOFR in
Among the tools published by the ARRC are                        new issuances, including explanations of
various recommended conventions for                              different SOFR variants, the possible use of a
implementing LIBOR transition. The first of                      SOFR Index,11 and the distinction among

                                                                                                                          MAYER BROWN   |   15
lockout, lookback and payment delay interest
                                                                         Sterling Working Group
                   payment conventions. The November 2019
                   appendix supplemented the conventions with            Recommendations and
                   sample key provision term sheets by interest          Resources
                   payment convention, and recommended FRN
                                                                         Another active working group on the global stage
                   fallback language.
                                                                         is the UK Working Group on Sterling Risk-Free
                   The swaps conventions analyze potential               Reference Rates (“Sterling Working Group”), which
                   technical specifications for interdealer trading of   recently finalized its spread adjustment
                   cross-currency basis swaps based on IBORs and         recommendations and has produced a wealth of
                   replacement risk-free rates (“RFRs”), including       transition tools for market participants.
                   IBOR-IBOR, RFR-RFR and RFR-IBOR swaps. The
                   ARRC notes that these conventions may not be          SPREAD ADJUSTMENT
                   suitable for dealer-to-customer or customer-to-       RECOMMENDATION
                   customer transactions.                                Consistent with its global counterparts, in
                   The most recent ARRC conventions support              September the Sterling Working Group
                   bilateral loans, are substantially similar to the     recommended12 the use of the historical five-year
                   syndicated loan conventions, and focus on the         median spread adjustment methodology when
                   ARRC’s recommended “in arrears” structures:           calculating the credit adjustment spread that
                   daily simple SOFR and daily compounded SOFR.          should be applied to any relevant Sterling
                   The conventions address both new and legacy           Overnight Index Average (“SONIA”) rate chosen
                   loans, and analyze structural issues, including       or recommended to replace GBP LIBOR pursuant
                   simple versus compounded SOFR, interest               to contractual fallback and replacement of screen
                   payment conventions, day counts, rounding,            rate provisions following a permanent cessation
                   interest rate floors, break funding and use of the    or pre-cessation trigger in relation to GBP LIBOR.
                   SOFR Index. The bilateral loan conventions also
                   note that market participants choosing to adopt       CONVENTIONS AND OTHER GUIDANCE
                   the Hedged Loan Approach to the ARRC’s                During September and October 2020 alone, the
                   recommended bilateral loan fallback language          Sterling Working Group has produced over a
                   (which falls back to ISDA’s successor rate and        half-dozen resources, including an updated list of
                   spread adjustment) should follow ISDA’s related       “top level priorities,” a paper describing how
                   conventions. Both the bilateral loan conventions      issuers might transition difficult-to-amend
                   and the syndicated loan conventions rely on the       contracts, such as bonds and securitizations, from
                   ARRC’s August 2020 technical reference                LIBOR to risk-free rates, and several resources
                   appendix, which provides additional detailed          relating to loan market conventions and transition.
                   discussion and spreadsheet calculations of the
                                                                         In updating its top level priorities,13 the Sterling
                   different lookback methodologies, calculations
                                                                         Working Group emphasized the need to cease
                   for daily simple SOFR and daily compounded
                                                                         issuing LIBOR-referencing products not later than
                   SOFR for loans and the implementation of daily
                                                                         the end of the first calendar quarter of 2021, and
                   interest rate floors.
                                                                         to accelerate efforts to transition derivative

16   |   Structured Finance Bulletin | Winter 2020
volumes from LIBOR to SONIA. Also updated were            independent RFR calculators (particularly
the roadmaps included in the priorities, as well as       addressing compounded rates) in the market.20
the product-specific target milestones, with active       The aim of these tools is to inform market
portfolio conversion still targeted to complete by        participants about, and support, the use of
the end of the third calendar quarter of 2021.            SONIA variants, and to allow market participants
                                                          to consider whether any amendments might be
The guidance on transitioning difficult-to-amend
                                                          required to their operating systems or product
bond and securitization transaction documents
                                                          offerings ahead of transition to such rates.
includes a discussion of the consent solicitation
process, which already has been used successfully         The UK Prudential Regulation Authority and FCA
to transition these tough legacy contracts.14             stated earlier this year21 that firms should expect
                                                          stepped up regulatory engagement with respect
Half of the recent resources relate to the loan
                                                          to LIBOR transition, which will be a “key input to
market and the instruments that underlie many
                                                          [the Financial Policy Committee’s] consideration
structured finance products. In publishing these
                                                          … whether sufficient progress is being made to
resources, the Sterling Working Group has stated
                                                          avoid seeking recourse to supervisory tools.”
that it hoped to facilitate “the maximum possible
degree of consistency across currencies, products
and market,”15 and that although some interim             Progress in Europe
transition targets were adjusted to address the           The transition to a new risk-free rate—the Euro
COVID-19 pandemic, the importance of                      Short-Term Rate, or €STR—has been slower in
transitioning product portfolios before the end of        Europe than in the United States and United
2021 is unchanged.16 The suite of resources includes      Kingdom. This may be because its interbank
detailed loans conventions17 (intended to support         offered rate—EURIBOR—was reformed in 2019
the use of SONIA in loan markets for sterling             to employ a “hybrid methodology” of rate
bilateral and syndicated facilities, including            quotation that relies on a three-level waterfall
multicurrency syndicated facilities where there is a      that prioritizes the use of real transaction data
sterling currency option) and a paper outlining           whenever available from a group of quoting
practical steps that market participants can take to      banks that is larger than the LIBOR panel. The
amend GBP LIBOR-referencing loans to SONIA.18             robustness of EURIBOR is reassessed annually,
The latter resource in particular emphasizes (i) the      and currently is deemed to comply with the EU
need to ensure that operating systems are updated         Benchmark Regulation (“BMR”). As a result of the
to accommodate alternative reference rates, (ii) the      2019 reformation, the quotation and use of
importance of treating customers fairly and               EURIBOR is not expected to cease as of January
mitigating any transfer of value between the parties      1, 2022 (subject, of course, to ongoing robustness
and (iii) the substantial time that will be required to   and BMR compliance).
amend all existing LIBOR-referencing loans.
                                                          Nonetheless, the European Central Bank (“ECB”)
The two most recent Sterling Working Group                is moving forward to establish €STR as a robust
tools, released on October 16, 2020, are an               and appropriate replacement rate and in October
overview of the key features of SONIA term                2020 released a summary of the responses22 to its
rates19 and a summary of the freely available             July 2020 consultation on compounded €STR term

                                                                                                       MAYER BROWN   |   17
rates.23 The respondents supported the proposed    SOR-linked products (following an approach
                   calculation methodologies for compounded rates     consistent with the United States, United
                   and index values, as well as proposed day-count    Kingdom and Europe, but not beginning until
                   conventions, selection of maturities and rate      late in the first quarter of 2021); a report on
                   precision of four decimal places.                  customer segments and preferences,29 which
                                                                      was compiled based on surveys of a range of
                   Most recently, on November 23, 2020, the ECB
                                                                      market participants and provides guidance on
                   released two new consultations: one on EURIBOR
                                                                      adopting SORA for various types of loan
                   Fallback Trigger Events24 and one on €STR-based
                                                                      products; a SORA market compendium30
                   EURIBOR Fallback Rates.25 The consultations seek
                                                                      (intended to serve as a companion to the
                   market feedback with respect to a proposed set
                                                                      customer segments report, and which analyzes
                   of potential permanent EURIBOR fallback trigger
                                                                      key issues by product type and provides fallback
                   events, and to the most appropriate EURIBOR
                                                                      language and conventions); and an end-user
                   fallback provisions for cash products, including
                                                                      checklist31 providing practical steps that should
                   rate structure, spread adjustment, and market
                                                                      be taken to effectively transition away from SOR.
                   calculation conventions. Comments are due by
                   January 15, 2021.                                  These resources follow the publication by the
                                                                      Monetary Authority of Singapore, the
                   The National Working Group on Swiss Franc
                                                                      administrator of SORA, of a SORA methodology
                   Reference Rates (the “Swiss Working Group”)
                                                                      document32 and related User Guide33 in
                   also has been making steady progress,26
                                                                      September. SC-STS has stated that it will be
                   emphasizing that conventions for its
                                                                      publishing additional resources to assist
                   replacement rate, the Swiss Average Rate
                                                                      corporate users and retail customers.
                   Overnight, or SARON, be consistent with the
                   international market. The Swiss Working Group
                   has published recommended fallback language        Legislative Solutions for
                   that tracks ISDA’s implementation.
                                                                      Legacy Contracts
                                                                      Perhaps the thorniest issue delaying transition
                   Singapore Working Group                            from IBORs to applicable replacement
                   Recommendations and                                benchmark rates is how to address so-called
                                                                      legacy contracts; that is, active contracts due to
                   Resources                                          mature after 2021, that were entered into before
                   The most ample set of transition guidance in       fallback rates for a permanent discontinuance of
                   Asia has been published in Singapore. On           LIBOR were contemplated, that are widely held
                   October 27, 2020, the Steering Committee for       by holders that are difficult or impossible to
                   SOR Transition to SORA (“SC-STS”) published27      identify, and that require unanimous holder
                   a suite of IBOR transition guidance documents      consent to amend essential provisions, such as
                   to lay the foundation for “a coordinated shift”    the interest rate. The nature of these contracts
                   from SOR to SORA.                                  has thwarted efforts to effectively transition
                                                                      them to a new benchmark interest rate. In
                   Included in these resources were: recommended
                                                                      response, governmental authorities in the
                   timelines28 for discontinuing the issuance of

18   |   Structured Finance Bulletin | Winter 2020
United States, UK, and Europe have introduced          encouraging firms to continue to prioritize active
legislative solutions to effect a mandatory and        transition away from LIBOR to alternative
automatic transition, under specified                  benchmarks, and providing further detail on the
circumstances, for these contracts.                    framework for the FCA’s enhanced powers.

                                                       Additional momentum was gained on November
                                                       18, 2020, when IBA announced its intention to
New York Senate Bill S9070,34 introduced October       cease the publication after December 31, 2021,
28, 2020, proposes to add a new Article 12 to New      of all tenors of GBP, EUR, CHF, and JPY LIBOR
York’s Uniform Commercial Code that substantially      settings,38 and again on November 30, when IBA
adopts the language from the proposed legislative      announced its intention to continue to publish
solution35 produced by the ARRC in March 2020.         the most frequently used tenors of USD LIBOR
The ARRC’s proposal establishes both mandatory         through June 30, 2023.39 Each of these
(for contracts that either are silent as to LIBOR      proposals is subject to IBA consultations
cessation or that default to the last quoted LIBOR     expected in December 2020. In connection with
in such event) and permissive (for contracts           IBA’s November 18 announcement, FCA stated40
granting the parties discretion to choose a fallback   that it will consult on policies for implementing
rate) applications of the statutory language, sets     its proposed new powers under the Financial
forth an “opt-out” provision, applies to all product   Services Bill and released two new consultations:
types and provides a safe harbor for “conforming       one with respect to the designation of
changes” consisting of operational or                  benchmarks41 and one with respect to the
administrative adjustments to implement the            exercise of its proposed new powers.42 43
transition. We understand that a similar bill,
applicable to all states, including New York, is       EUROPE
under consideration at the federal level.
                                                       Earlier this summer, in July, the European
                                                       Commission proposed an amendment to the EU
                                                       Benchmark Regulation44 to enable the
On October 21, 2020, the UK government                 amendment of specified financial instruments or
released its promised draft legislation36 to           contracts by way of a directly applicable
assist the “tough legacy” issue for certain            regulation, to avoid a significant disruption in
LIBOR-referencing contracts by providing the           the functioning of the EU financial markets. A
FCA with new and enhanced powers to oversee            new Article 23(a) would empower the European
the orderly wind-down of critical benchmarks,          Commission to designate a mandatory
such as LIBOR. The legislation includes the            replacement benchmark and, by operation of
authority, subject to specified requirements, for      law, replace all references to a benchmark that
the FCA to direct a change in the methodology          has ceased to be published with the
of a critical benchmark and extend its                 replacement benchmark. This legislative solution
publication for a limited time period.                 would apply to financial instruments, financial
Contemporaneously, HM Treasury issued a                contracts and measurements of the performance
policy statement37 supporting the proposed             of an investment fund that are within the scope of
amendments to the UK Benchmark Regulation,             the BMR; that is, in EU contracts involving EU

                                                                                                    MAYER BROWN   |   19
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