Law firm of the year: Linklaters

Risk awards 2021: lawyers raced against time to draft fallback protocol vital to Libor transition

Deepak Sitlani

Photo: Linklaters

For most, the summer provided a much-needed respite from the swirling chaos of the Covid-19 pandemic. Not so for the derivatives partners at Linklaters, who were racing against the clock to finish drafting a protocol vital for the transition away from Libor. 

Before the fallbacks protocol designed to switch legacy contracts to new risk-free rates (RFRs) could be published and made available for parties to sign, it had to be approved by the US Department of Justice, and no-one knew how long that process would take.

“It wasn’t pleasant,” says Deepak Sitlani, a partner at Linklaters. “We found like with any kind of documentation process, the nearer you get to the end the more things come out of the woodwork,” he says.

Central banks and regulators were pushing for additional fallback to be included in the protocol in case new RFRs to replace Libor for their individual currencies fell away.

At the same time, it was brought to Linklaters’ attention that two Ibor rates – the Singapore Swap Offer Rate (SOR) and Thai Baht Interest Rate Fixing (THBFix) – worked slightly differently to the others covered in the protocol. Rather than solely relying on local Ibors, SOR and THBFix were synthetic rates that used a set of inputs, including US dollar Libor. That meant Linklaters had to get under the bonnet and figure out how administrators would produce and administer these rates in the event of US dollar Libor ceasing to be published.

“That all kind of hit us at a similar time, when actually there was a lot of pressure to finalise the documents for it to be sent to the DOJ,” says Sitlani.

They got there in the end. The Department of Justice gave the protocol the green light on October 1 and the International Swaps and Derivatives Association – the industry group overseeing the changes to swaps documentation – published the final version on October 23, 2020.

By the time the protocol took effect on January 25, nearly 13,000 legal entities – including the largest swap dealers and asset management – had signed it. Trillions of dollars worth of derivatives contracts were automatically updated with fallback language that will re-hitch them to new RFRs following Libor’s demise.    

We found like with any kind of documentation process, the nearer you get to the end the more things come out of the woodwork

Deepak Sitlani, Linklaters

One banker jokes that without the protocol, there wouldn’t be enough lawyers in London to complete the contract changes quickly enough.

While the protocol will need thousands more signatories to reach critical mass, Sitlani is satisfied with the early results. “If I’d asked myself the question a few months ago: would I be happy if you’ve got over 10,000 adherents, which includes most of the large financial institutions, if not all? I’d take that,” he says. “Looking at the numbers, it definitely feels like a success.”

The almost universal adherence among large dealers was particularly encouraging, he adds. “I got feedback from one dealer on day one that said: ‘even if it is just stuck with these firms, it’s done a good job for us,’” says Sitlani. “Because the other firms [already signed up to the protocol] are all larger banks, it will handle a large notional amount of their positions.”

On your marks

The sprint finish this summer marked the end of a long marathon that Linklaters has been running since 2016. The Financial Stability Board wrote to Isda five years ago requesting that it look into developing fallbacks. The industry group immediately turned to Linklaters for help.  

At that early stage, the fallbacks protocol was only envisaged to cover the 2006 Isda definitions, which are used as a market standard set of terms for over-the-counter interest rate derivatives contracts. However, Sitlani says as they started working on the protocol, it became clear that Isda’s members wanted it to go further and address other issues, such as assigning a calculation agent for the replacement rates.

“The drafting just became much more expansive than anyone was really expecting up front,” says Sitlani. “The expectation at the beginning was that we’d be really zeroing in on trades that incorporate the 2006 definitions. But as we were having conversations with the Isda working group, what became apparent was that the market was really looking to rely on the protocol to remedy much more than Ibor fallbacks in the 2006 definitions.”

Its work with Isda also made Linklaters an obvious choice for market participants looking for legal advice on their own Libor projects. “One reason why we decided to choose them was because of their extensive work with market associations and with regulators on this particular topic,” says a buy-side source. “We really needed a law firm that isn’t just able to execute a project but is able to think ahead and offer their views on what the market is doing, and where they think the regulators and market associations are going.”

Repack lift-off

Elsewhere, a multi-dealer structured products platform for which Linklaters drafted the legal framework saw a big pick-up in transactions. The Single Platform Investment Repackaging Entity, or Spire, allows dealers to issue structured products with standardised contracts through a shared special purpose vehicle (SPV). Spire issued its first note in May 2017.

David Phillips, a partner at Linklaters, says around 140 trades were put through the platform in 2019 and more than 250 in 2020.

The volatility in financial markets caused by the coronavirus pandemic led to an uptick in structured products. But that’s not the only reason volumes on Spire have been rising, according to Phillips.

First, growing numbers of investors have reached the finishing line for the Spire onboarding process. Phillips says it takes them time to go through their internal authorisation and reach the stage where they can begin purchasing securities.

One reason why we decided to choose them was because of their extensive work with market associations and with regulators on this particular topic

Buy-side source

Second, the platform has attracted three of the dealers from a rival initiative – known as the Standard Repackaging Documentation initiative – which also sought to harmonise contracts between participating dealers. Several other large and regional dealers also joined Spire in 2018 and 2019. As more dealers join the platform, more investors have followed.

Issuers on the platform must stick to certain rules set by its founders and many rely on Linklaters to advise them on new deals. “One of the key differences between a bank having its own repackaging platform and a bank having a shared repackaging platform, is that they need to have comfort that the sorts of transactions being put through that platform are appropriate,” says Phillips. “If somebody else can use your platform, you need to be comfortable with what they are going to put through that platform.”

Although other law firms can draft documentation for trades being issued from Spire, Linklaters’ role in designing the framework gives the firm a knowledge edge over its rivals.

“We did a few transactions this year where Linklaters was instrumental, because without its knowledge of Spire, which of course it had created from a legal perspective, we wouldn’t have been able to deliver,” says one dealer. “Spire is more constrained on what dealers can do compared to other SPVs, so ensuring a trade fits with all these constraints is sometimes not very easy.”