Corporate Borrowers Must Engage More in SOFR Phase-In

May 24, 2019 Eric Juzenas




The derivative and cash markets in the US are heading toward the adoption of very different approaches to calculate the new rate to replace London interbank offering rate (Libor), an outcome that could present borrowers with significant hedging and operational challenges. And because of a lack of feedback from commercial borrowers, this is increasing the risk that the solutions regulators decide upon will not fit borrowers’ needs.

The compounded setting in arrears rate referred to by ISDA is set at the end of the term or reset period, whereas as term rate such as Libor is set at the beginning. Eric Juzenas, director of global compliance and regulation at Chatham Financial, said that the compounded setting in arrears rate “may be closer in behavior to a term rate. However, he said, it still presents operational difficulties in terms of cash management and the fact that the term and compounded rate structures are different.”

He added that the ARRC’s and ISDA’s fallback language proposed in consultations is voluntary, and that companies can individually negotiate fallbacks as well the type of SOFR rates for their loans and hedges, whether term or compounded. To make those decisions, however, will require analyzing the practical impact. 

“End users need to begin focusing on the practical implications of these rate choices and whether or not regulators are going to pressure dealers to support one rate over another rather than let the markets evolve,” Mr. Juzenas said. “SOFR has been created largely in response to regulatory pressure, it remains to be seen what Libor successors will best match market needs.”

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About the Author

Eric Juzenas

Eric is Chatham Financial's Global Head of Compliance and Regulation. He advises on derivatives regulatory compliance and legal documentation, including regulatory advisory, ISDA negotiation, pre- and post-trade compliance processes, and standalone regulatory technology solutions for clients, including reporting, valuations, portfolio reconciliation, and collateral management. He covers both US and European regulations. Eric has advised a range of clients including senior government officials, Members of Congress, and financial and commercial firms on derivatives regulation and compliance. He has played a central role in derivatives policy, helping write and implement portions of the Dodd Frank Act and working on several reauthorizations of the US Commodity Futures Trading Commission (CFTC). He has also participated in international policy and regulatory efforts with the European Union, Financial Stability Board, and the International Organization of Securities Commissions (IOSCO). At the CFTC, he was a deputy to the US Financial Stability Oversight Council. Prior to Chatham, Eric worked at Bloomberg, LP in their Global Regulatory Policy Group covering US and European regulation. Previously, he spent eleven years at CFTC in a variety of roles including Chief of Staff, Chief Operating Officer and Senior Counsel to Chairman Gary Gensler, Commissioner Michael V. Dunn and Commissioner Sharon Y. Bowen. He began his career in derivatives spending six years as Deputy Chief Counsel and Counsel to the US Senate Agriculture, Nutrition and Forestry Committee where he was responsible for writing and advising on derivatives legislation and policy. Eric graduated from the University of Wisconsin-Madison with a degree in Philosophy and certificate in Integrated Liberal Studies. He holds a law degree from the George Washington University Law School, and a masters degree in Environmental/Occupational Health from the Milken Institute School of Public Health at George Washington University.

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