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  #91  
Old 05-23-2018, 12:48 PM
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Mary Pat Campbell
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http://www.naic.org/capital_markets_...uzz_180522.pdf

Quote:
THE RISE IN LIBOR
MAY 22, 2018

Executive Summary
• The rise in LIBOR in early 2018 is a function of technical
external factors and not a sign of stress in the financial
markets
• No immediate impact on the credit quality of insurer
investment portfolios, but high yield issuers and others
that rely heavily on the short-term and variable rate
markets for funding should be monitored closely
• LIBOR to be phased out over the next several years, with
alternatives currently being tested
• The transition away from LIBOR will require market
participants, including insurance companies, to review all
financial contracts that reference the short-term rate
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Old 05-23-2018, 12:49 PM
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Mary Pat Campbell
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from the end of that presentation:
http://www.oliverwyman.com/content/d...in%20Focus.PDF

Quote:
LIBOR FALLBACKS IN FOCUS
A LESSON IN UNINTENDED CONSEQUENCES

EXECUTIVE SUMMARY

Market participants are undertaking significant work to prepare for a transition away from
LIBOR. The recent launch and reform of preferred alternative reference rates to USD LIBOR
and GBP LIBOR, respectively, are important steps in this transition journey. However, LIBORbased
products are still being created, sold and entered into on a daily basis. A large book
of financial instruments is likely to endure past 2021, when the Financial Conduct Authority
(the “FCA”) intends no longer to persuade or compel banks to submit to LIBOR.

The question then is what happens to these LIBOR-based products when LIBOR is no longer
available? As Andrew Bailey, the Chief Executive of the FCA, has noted, this depends on “the
preparations that users of LIBOR make in either switching contracts from the current basis
for LIBOR or in ensuring that their contracts have robust fallbacks in place that allow for a
smooth transition if current LIBOR did cease publication.”

So, what contractual fallbacks are in place today and what would happen if publication of
current LIBOR were to cease, triggering those fallbacks?

The answer is complex. Outside the derivatives world, fallback language is frequently
inconsistent, particularly across products and institutions. The definition of LIBOR, the
trigger for the fallbacks, and the fallbacks themselves vary significantly, even within the same
product sets. Additionally, existing contractual fallback language was typically originally
intended to address a temporary unavailability of LIBOR, not its permanent discontinuation.
This means that, in many cases, existing fallback language will produce unintended results
that can dramatically affect the very structure and economics of the product. In some cases,
floating rate products will become fixed, while in other cases, interest rates for the borrower
may increase substantially.

Given the potential consequences of some existing fallback language, continuing to enter
into contracts using such language carries real economic and potentially other risks. Market
participants should move to using fallback language that is written with the permanent
discontinuation of LIBOR in mind to minimize these risks.

This publication focuses on the legal framework and other issues related to fallback
language.1 To give a more tangible sense of what may be at stake and the efforts required to
transition, we provide in-depth analyses in three important product areas: derivatives, credit
facility transactions, and unsecured securities issued in the capital markets.
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