Spens clause and Synthetic LIBOR: Difference between pages

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A potentially strong form of protection for lenders/investors in securities, designed to mitigate the adverse effects of call risk for investors.
''Interest rates - reference rates - LIBOR transition - Financial Conduct Authority.''


Under a Spens clause the borrower/issuer has to value the cash flows beyond the date of the call/redemption at the government bond yield, or some other low rate.
Proposals for the continued calculation and publication of a limited number of sterling and JPY rates under a changed methodology, after the cessation of the current LIBOR panels at the end of 2021.


This potentially makes it prohibitively expensive for the issuer to take an early redemption.


For example the Bank of England's purchase scheme for corporate bonds favours bonds having a Spens clause.
:<span style="color:#4B0082">'''''Key points for corporates from Edward Schooling-Latter's speech (FCA) - synthetic LIBOR'''''</span>
 
:"While the FCA is also taking steps to provide a time limited safety net to help contracts that can’t be transitioned, this does not remove the need for firms to act.
 
:Certain, yet to be determined ‘tough legacy’ contracts will be allowed to use a synthetic LIBOR rate based on forward-looking term RFRs, so SONIA for sterling, plus the relevant ISDA spread adjustment."
 
:''ACT blog - Sarah Boyce - 15 July 2021''


The consequence of a Spens clause for the investor is that they can re-invest the redemption monies in government stock, thus preserving their originally expected cash inflows at lower risk.


== See also ==
== See also ==
* [[Call protection]]
* [[Benchmarks Regulation]]
* [[Call risk]]
* [[Financial Conduct Authority]] (FCA)
* [[Loan agreement]]
* [[ISDA spread adjustment]]
* [[Make whole clause]]
* [[Legacy]]
* [[LIBOR]]
* [[Risk-free rates]] (RFR)
* [[SOFR]]
* [[SONIA]]
* [[Transition risk]]
 
 
==External link==
 
[https://www.fca.org.uk/news/statements/fca-consults-proposed-decision-require-synthetic-libor-6-sterling-and-japanese-yen-settings FCA consults on proposed decision to require synthetic LIBOR for 6 sterling and Japanese yen settings]


[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Investment]]
[[Category:Long_term_funding]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_frameworks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]

Revision as of 23:27, 17 July 2021

Interest rates - reference rates - LIBOR transition - Financial Conduct Authority.

Proposals for the continued calculation and publication of a limited number of sterling and JPY rates under a changed methodology, after the cessation of the current LIBOR panels at the end of 2021.


Key points for corporates from Edward Schooling-Latter's speech (FCA) - synthetic LIBOR
"While the FCA is also taking steps to provide a time limited safety net to help contracts that can’t be transitioned, this does not remove the need for firms to act.
Certain, yet to be determined ‘tough legacy’ contracts will be allowed to use a synthetic LIBOR rate based on forward-looking term RFRs, so SONIA for sterling, plus the relevant ISDA spread adjustment."
ACT blog - Sarah Boyce - 15 July 2021


See also


External link

FCA consults on proposed decision to require synthetic LIBOR for 6 sterling and Japanese yen settings

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