​Adopting Alternative Reference Rates ​September 2019

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Replacing LIBOR: Alternative Reference Rates Overview

1 LIBOR Faces an Uncertain Future 2 Global Developments in Alternative Rates Place content Place content below this line “The regulator of LIBOR has said that it is a matter of how LIBOR ARRC published fallback language for new USD LIBOR below this line will end rather than if it will end, and it is hard to see how one could cash market products be clearer than that” “Many seem to take comfort in continuing to use LIBOR…but Reformed Sonia gaining liquidity history may not view that decision kindly” – Randal Quarles, FRB, June 2019 EONIA to be redefined as ESTR + spread in October

Regulatory and advisory bodies have identified flaws with LIBOR BOJ Study Group selected TONA; multi-rate approach

Lack of Potential for Judgement Based SNB changed policy target rate to SARON Transaction Data Manipulation

3 Transition from LIBOR to Occur Over Next 2.5 Years

2018 April 3, 2018: NY Fed began publishing SOFR

April 23, 2018: BoE began publishing Reformed SONIA

2019

2YPeriod

2020 FCA may compel banks to submit towards LIBOR for a maximum 2Y period; however, the FCA has confirmed that all 20 panel banks have agreed to support LIBOR until 2021

2021 Source and Footnotes Guideline Uncertainty

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Alternative Reference Rates – Global Streams

• The Financial Stability Board (FSB) and Financial Stability Oversight Council (FSOC) determined that the secular decline in Place content Place content below this line wholesale unsecured short-term funding by banks poses serious structural risks for unsecured benchmarks below this line – Actual transactions make up <30% of data used to produce 3M and 6M USD Libor • Central Banks initiated working groups beginning in 2014 to address this issue and establish alternative reference rates compliant with IOSCO principles

UNITED EUROPEAN UK JAPAN SWITZERLAND STATES UNION

• Alternative Reference • Study Group on Risk-Free • Working Group Rate Committee • Working Group on Reference Rates formed by FSMA, • National Working Working Group (ARRC) Sterling Risk-Free ESMA, ECB, and the • Cross-Industry Committee Group − Buy-Side Advisory Reference Rates EC on Japanese Yen Interest Group Rate Benchmarks

• Bank of Japan (“BOJ”), • Federal Reserve • Bank of England • European Central • Swiss National Bank Sponsor Central Bank Japan Financial Services Board (“BOE”) Bank (“ECB”) Agency (Observer)

• Selected Secured • Selected Unsecured • Selected Unsecured • Selected Unsecured • Selected Secured Alternative Reference Overnight Financing Reformed Sonia €STR (Sept. 2018) TONA (Dec 2016) SARON, an overnight Rate Proposals / Rate “SOFR” (Apr 2017) GC Repo Rate Selections (Jun 2017)     (Feb 2016) 

• Trade-off between • High-level • Proposed roadmap • “Paced” transition, ease of implementation implementation plan • Termination of the for interest rate replacing LIBOR & depth of market (OIS published by ECB WG TOIS fixing 12/29/17; benchmark reform Transition Strategy then LIBOR) in Sept. 2018 SARON replaced • SOFR publication published in August TOIS in advance began April 3, 2018 • Sonia reforms took • EU BMR takes effect 2018 effect April 23, 2018 on Jan 1, 2022

Source and Footnotes Guideline 1. Additional jurisdictions that are currently in progress for selecting a fall-back rate are Australia, Singapore and Hong Kong

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Increased Focus on Observable Transactions

1 Most LIBOR Submissions Based on Expert Judgement 2 Low Level of Transactions Supporting ~$200Tn Contracts Place content Place content below this line ​Submissions Types (%) ​Days with Observed 3M LIBOR Volume (%) below this line

100% 14% Median 12% 75% 10% 8% 50% 6% 25% 4% 2% 0% 0% ON / SN 1W 1M 2M 3M 6M 12M $500MM $1.0Bn $1.5Bn $2.0Bn $2.5Bn >$3.0Bn Transaction Based Transaction Derived Market Data Based

3 SOFR is Fully Transaction Based… 4 …With Robust Underlying Volume

Aggregate Volume ($Bn) YTD Daily Volume ($Bn)

1,500 1200 1,050.0 1,200 1000 800 900 600 600 400 149.0 300 200 68.0 13.0 1.1 0.3 0.1 0 0 Aug-14 Aug-15 Aug-16 Sep-17 Sep-18 Sep-19 SOFR OBFR EFFR 3M T-Bills 3M GSIB 3M AA 3M A2/P2 Wholesale NonfinancialNonfinancial TGCR BGCR SOFR Funding CP CP Sources: “IBA 2018 Q1 Report on Volumes” ICE LIBOR Source and “Introducing the Secured Overnight Financing Rate (SOFR)” Joshua Frost, FRBNY, November 2, 2017 Footnotes Guideline “Introductory Remarks” Governor Jerome Powell, Federal Reserve System, November 2, 2017 Historical Repo Rates Data – Federal Reserve Bank of New York

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Next 12 Months | Projected Transition Timeline in the US

Place content Place content below this line October 1, 2018 below this line Past Development 4Q’19 CME began clearing OTC ISDA to publish new IBOR fallback 2H’2020 Upcoming Development swaps referencing SOFR terms including credit adjustment CCPs may adjust USD using SOFR discounting calculation1 discounting/PAI regime from EFFR to SOFR, pending input • Length of lookback period from respective clients July 16, 2018 • Mean vs. median calculation LCH began clearing OTC swaps that reference SOFR, using EFFR discounting

2018 Jan. 2019 2H’2020

April 3, 2018 NY Fed began May 7, 2018 publishing SOFR CME launched SOFR futures April-May 2019 December 20, 2018 ARRC released ISDA released final new LIBOR fallback results of benchmark terms for use in consultation new cash products

Jul-Dec 2018 Jan-Mar 2019 Jan-Mar 2020 Apr-Jun 2021 YE 2021 ARRC Develop infrastructure for Market readiness to Ability to trade cleared CCPs no longer accept Creation of a term reference Paced futures/OIS trading in trade cleared contracts based on either new swap contracts for rate based on SOFR- Transition SOFR OIS referencing SOFR and current EFFR clearing with EFFR as PAI derivatives markets once SOFR in current PAI discount curves and discounting unless liquidity has developed Timeline Trading begins in futures environment risk-reducing for legacy sufficiently to and/or bilateral uncleared contracts produce a robust rate OIS referencing SOFR

Source and Footnotes Guideline 1. ISDA definitions for EURIBOR and EUR LIBOR will be amended at a later date

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ISDA Consultation | Review of Results from 2018

Place content Place content below this line  ISDA completed a consultation to develop fallbacks to a RFR in the event a key IBOR is discontinued below this line

 Market participants responding to the consultation prefer compounding in arrears (term adjustment) and historical average (credit adjustment)

 ISDA’s fallback protocol is a backstop and is not intended to replace the voluntary conversion of IBOR swaps to swaps linked to RFRs

Term Adjustment: Compounding in Arrears Credit Adjustment: Historical Average

​Description: Compound observed daily rates over the full ​Description: Spread between LIBOR and RFR (adjusted period, final rate is set at the end of the period for term component) equal to average differential over past [x] years. There will be a transition period to avoid a “cliff effect”

Source and Footnotes Guideline 1. ISDA Consultation applied to only GBP LIBOR, CHF LIBOR, JPY LIBOR, TIBOR, Euroyen TIBOR and BBSW 2. Length of the Historical Average lookback period and averaging calculation (median vs. mean) are still undetermined

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ISDA Consultations | Remaining Work in 2019

Place content Place content below this line 1 2 3 Additional Currencies Pre-Cessation Issues Spread Adjustment below this line

What should be the How should the credit How should the protocol Key fallback mechanism for spread adjustment deal with statements of USD LIBOR, CDOR, and between RFRs & IBORs Question non-representativeness? HIBOR? be calculated?

• Historical mean/median • International Regulators (OSSG) • 2018 consultation covered GBP approach selected for RFR credit encouraged ISDA to seek market LIBOR, CHF LIBOR, JPY LIBOR, adjustment, though calculation opinion on pre-cessation issues TIBOR, Euroyen and BBSW parameters not yet finalized • ARRC included pre-cessation Background • This consultation asks the same 1. Should calculation be a triggers in recommended fallback questions of 3 additional mean or a median? language for new USD LIBOR currencies (USD, CAD, CNH) cash products 2. What is the length of the lookback period?

Timeline May’19 – July’19 May’19 – July’19 3Q’19 – YE’19

Respond Complete Complete −

Source and Sources: “Timeline for Implementation of IBOR Fallbacks” – ISDA – February 2019 Footnotes Guideline “Derivative Contract Robustness to Risks of Interest Rate Benchmark Discontinuation” – Andrew Bailey, John Williams – April 2019 “May 2019 Benchmark Fallbacks Consultations” – ISDA – May 2019

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Transition Challenges in the US Cash Market

Cash Market Roll-Down Over Time Typical Contract Language Varies Across Cash Products Place content ​$Tn Outstanding Place content below this line Fallback Rate Consent Required below this line 9.0

• Obtain bank quotes  • Bilateral Loans: Alternative Base Rate Agreement between 8.0 Business − Prime Rate borrower and lender Loans − EFFR plus fixed • Syndicated Loans: Unanimous consent 7.0 spread

6.0 71% of Cash Products mature by • Obtain bank quotes  YE2021, compared with 82% for Bonds • Unanimous consent Fixed Rate at last total USD LIBOR exposure (FRNs) among bondholders 5.0 published LIBOR set

4.0 • Agency MBS and CMO: • Agency MBS and CMO: Issuer selection Unanimous consent 3.0 Securitized • Non-agency MBS and • Non-agency MBS and ABS: Bank poll  Fixed ABS: Unanimous consent (1) Products Rate at last published • CLO: Unanimous consent 2.0 LIBOR set (typically called after 1-2 • CLO: Final LIBOR set years)

1.0

• Alternative Base Rate 0.0 Mortgages / plus / (minus) spread Current YE 2021 YE 2025 YE 2030 YE 2040 Consumer • Chosen by noteholder − Spread component Securitized Products Bonds (FRNs) Consumer Loans Business Loans Loans undefined

Source and Source: “Second Report,” Alternative Reference Rates Committee, March 2018 Footnotes Guideline 1. Securitized Products include MBS & CMOs, CLOs, ABS and CDOs

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Recent Developments in LIBOR Transition

Regulator Developments Market Developments • Quarles on complications to CCAR Place content caused by SOFR lending Place content below this line • FASB Proposal Released • ARRC Publications on Consumer Products − “Choosing to lend at SOFR rather than below this line − Contract modification relief will be − Guiding principles: ensures consumer LIBOR will not result in lower provided products are treated with the highest projections of net interest income − Eligible hedge accounting relationships standard of care regarding equitable and under stress in the stress-test will not be required to be discontinued transparent outcomes calculations of the Federal Reserve” − Proposed standard includes examples of − Consultation on fallback language: eligible and ineligible changes Market consultation on new USD Libor • Williams on waiting for term rates in − Proposal subject to 30-day comment fallback to compounded SOFR in RFRs period advance − “Don’t wait for term rates to get your − Relief intended to sunset in Jan. 2023 − Proposed ARM structure using SOFR: house in order. Engage with this issue

Proposed methodology for constructing now and understand what it means for • SEC Guidance on Disclosures adjustable rate mortgages based on − Heightened disclosures are appropriate your operations” averages of SOFR (comp. in advance) for dealers and investment managers • Bailey on adding a credit spread that are trading, investing in, or selling • CME/LCH Discounting Adjustment component to RFRs LIBOR linked products Proposal − “We see no prospect of the • FHFA Statement on GSE Oversight − Proposed discounting/PAI change for all administrator being able to continue − Eventually will bar Fannie Mae & USD interest rate swap products in with a dynamic credit spread – the Freddie Mac from purchasing LIBOR 2H’2020 likely choice would be between a risk- linked adjustable rate mortgages − Compensation mechanics may include free rate plus fixed spread, or nothing. cash and basis swap transfer • Treasury Borrowing Advisory Committee In other words this does not provide a Discusses SOFR-based FRN route to making LIBOR representative − Supportive of issuing a 1Y SOFR FRN, again”

pending further analysis Key Speeches • Bailey on what might happen after 2021 • IOSCO Statement on LIBOR Transition − “We do expect panel bank departures − The best risk mitigation to a LIBOR from the LIBOR panels at end-2021” cessation event is moving to RFRs now 1. Randal Quarles (Vice Chair of FRB) − “The FCA will not hesitate to make the

2. John Williams (Pres. of NY Fed) representativeness judgments that it is required, under law, to make” 3. Andrew Bailey (CEO of FCA)

Source and Footnotes Guideline

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ARRC Dashboard | Priorities for 2019 In addition to the ARRC’s paced transition plan, ARRC objectives for 2019 include:

ARRC Objectives 2019 Priorities / Milestones Date Place content Place content below this line below this line

Build market liquidity and • FRB staff to publish indicative compounded SOFR and forward-looking SOFR • 2Q’19  • ARRC to launch infrastructure and Ops working group • 2Q’19  drive demand for SOFR • Encourage launch of SOFR loans and securitizations • YE’19

• ARRC to issue recommended fallback language for FRNs, syndicated loans, • 2Q’19  bilateral loans, and securitizations Create and implement • ARRC to assess fallback spread adj. for cash products • 2H’19 • ISDA to finalize definition amendments and release protocol for legacy trades • YE’19 robust fallbacks • ARRC to continue to identify needed regulatory relief and tax/accounting • Ongoing requirements to eliminate hurdles in transition • ARRC to explore options for NY State legislative relief on legacy products • Ongoing

• ARRC to launch consumer products working group (incl. CFPB) • 1Q’19  Launch consumer products- • ARRC to consult on consumer product fallbacks and describe applications of • 2Q’19  focused working group SOFR in consumer products • ARRC members to introduce an ARM structure based on SOFR • 2Q’19 – 3Q’19 

• ARRC to continue ongoing targeted engagement through trade associations, industry conferences and media with policymakers to coordinate transition Education and outreach • ARRC to continue to issue best practices, FAQs and consultations • Ongoing • ARRC to publish bi-monthly newsletter to promote transparency and awareness of developments

Coordinate across national • ARRC to continue regular communication with other NWGs and cross-currency • Ongoing workstreams to share best practices and identify risks working groups • NWGs to provide update on implementation progress and plans • 2H’19 Source and Footnotes Guideline

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Appendix

Source and Footnotes Guideline

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U.S. Alternative Reference Rate | SOFR

• On June 22, 2017, the ARRC selected the SOFR as the alternative rate for USD LIBOR. Thereafter, the Federal Reserve Board issued a request for public comment on the three new reference rates to be published Place content 1. SOFR, Secured Overnight Financing Rate – selected by the ARRC as alternative reference rate to LIBOR Comprised of UST BNY Place content below this line below this line Triparty, DTCC Cleared Bilateral (trimmed) and GCF trades 2. TGCR, Triparty General Collateral Rate – only UST BNY Triparty trades 3. BGCR, Broad General Collateral Rate – UST BNY Triparty trades and DTCC Cleared GCF trades (excluding DTCC Cleared Bilateral)

• On February 28, 2018, the NY Fed announced its plans to begin the publication of the three new reference rates on April 3, 2018

• On March 9, 2018, the NY Fed released a time series of the volume-weighted mean rate of the primary dealers’ overnight Treasury general collateral repo borrowing activity as collected each morning by the Open Market Trading Desk

• Additional information on SOFR: – High daily notional volume/transactions (~$1Tn) – Publication time of approximately 8:00AM ET based on the prior day’s trading activity

• SOFR derivatives (futures and swaps) began trading in mid-2018, and though liquidity remains limited, an implied term structure can be derived that may help alleviate one of the biggest challenges for the cash market

(%) 3.5

2.8

2.1

1.4

0.7

0.0 August-14 August-15 August-16 September-17 September-18 September-19 Secured Overnight Financing Rate Source and Footnotes Guideline Source: New York Fed Staff calculations

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U.S. ARRC Broadened to Facilitate LIBOR Transition In March 2018, the ARRC was expanded to include a broader set of market participants to increase coordination

• Intended to ensure the successful implementation of the Paced Transition Plan and will support the committee’s ability to coordinate and Place content Place content below this line track planning across financial products as market participants transition to alternative reference rates and address risks in legacy contract below this line language

MEMBERS ​EX OFFICIO MEMBERS • American Bankers Association* • International Swaps and • Board of Governors of the • AXA* Derivatives Association Federal Reserve System • Bank of America • JP Morgan Chase & Co. • Consumer Financial Protection Bureau* • BlackRock* • LCH Clearnet • MetLife* • Federal Deposit Insurance • Citigroup Corporation* ​ARRC • Morgan Stanley • CME Group • Federal Housing Finance ​Membership • CRE Finance Council* • National Association of Corporate Agency* Treasurers* • Deutsche Bank • Federal Reserve Bank of New • Pacific Investment Management York • Federal National Mortgage Company* Association* • Office of Financial Research • TD Bank* • Federal Home Loan Mortgage • Office of the Comptroller of the Corporation* • The Federal Home Loan Bank of Currency* New York* • GE Capital* • U.S. Commodity Futures • The Independent Community Trading Commission • Goldman Sachs Bankers of America* • Government Finance Officers • U.S. Securities and Exchange • The Loan Syndications and Commission* Association* Trading Association* • U.S. Treasury Department • HSBC • The Securities Industry and • Intercontinental Exchange* Financial Markets Association* • Wells Fargo Source and • World Bank Group* Footnotes Guideline *Designates a new member of the ARRC

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Frequently Asked Questions – SOFR

​Why does the market need a new benchmark rate? ​What sort of financial products are expected to reference SOFR? Place content ​LIBOR is increasingly based on the expert judgment of panel banks due to the ​SOFR is suitable to be used across a broad range of financial products, including but Place content below this line declining amount of unsecured, wholesale borrowings by banks since the financial not limited to, derivatives (listed, cleared, and bilateral-OTC), and many variable rate below this line crisis. For this reason, LIBOR is increasingly less of a robust, transactions-based cash products that have historically referenced LIBOR. market interest rate as envisioned by international standards for benchmarks. ​What is “fallback language”? ​What other rates were considered for replacing USD LIBOR? ​“Fallback language” refers to the legal provisions in a contract that apply if the ​The ARRC considered a comprehensive list of potential alternatives, including other underlying reference rate in the product (e.g. LIBOR) is discontinued or unavailable. term unsecured rates, overnight unsecured rates such as the Effective Federal Funds Rate (EFFR) and the Overnight Bank Funding Rate (OBFR), other secured repo rates, ​What should market participants do to strengthen fallback Treasury bill and bond rates, and overnight index swap rates linked to EFFR. language in derivatives? ​Will there be a “term SOFR”? ​ISDA is in the process of updating the definitions of USD LIBOR and other key benchmarks tied to interbank funding markets used in derivatives contracts to include ​Once the initial steps of the ARRC’s Paced Transition Plan are successfully new fallbacks (SOFR with certain contemplated adjustments for USD LIBOR) in the accomplished, which is expected in 2021, and liquid derivative markets referencing event of a permanent discontinuation of the relevant benchmark. ISDA also plans to SOFR have developed, the final step in the Paced Transition Plan calls the creation of publish a multilateral protocol to assist market participants in including the amended a forward-looking term rate based on SOFR-linked derivative markets. definitions (i.e., the definitions with fallbacks for benchmark cessations) in legacy swap ​Who administers and produces SOFR and how is the rate contracts. production process reviewed? ​What should market participants do to strengthen fallbacks in ​The New York Fed is the administrator and producer of SOFR. The New York Fed cash products? publishes SOFR on a daily basis on its website at approximately 8:00 a.m. eastern ​Although the timing and method of implementing new fallbacks in cash products will time. An internal New York Fed Oversight Committee periodically reviews the rate vary with the product type, the ARRC plans to consult on standardized fallback production process. The Oversight Committee consists of members from across the language available for voluntary adoption for a variety of cash products by the end of New York Fed organizational structure who are not involved in the daily production of 2018. SOFR. ​How do we know SOFR is here to stay? ​Is SOFR meant to co-exist with LIBOR, or is it meant to replace LIBOR? ​The overnight U.S. Treasury repo market that SOFR is based on is the largest rates market at a given maturity in the world, and SOFR encompasses the widest coverage ​The ARRC’s focus is to encourage voluntary adoption of SOFR, rather than to mandate of the market available, which will allow it to evolve with the market. The ARRC a transition away from USD LIBOR. SOFR, therefore, will co-exist with USD LIBOR as concluded that SOFR is superior to USD LIBOR, and other alternative reference rates long as USD LIBOR is published, offering market participants an alternative reference considered by the ARRC. The coordination with a broad range of financial market rate for new transactions. participants, and commitments from the private-sector (including the financial services industry) will ensure the availability, adoption, and transition to SOFR in a smooth and ​Who will be impacted by this transition to SOFR? timely manner. ​Due to the broad use of USD LIBOR as a reference rate, all financial market participants including retail customers, corporations, issuers, investors, asset Source and managers, service providers of financial products, and large financial institutions are impacted by the risks associated with USD LIBOR. Footnotes Guideline

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Additional Global Developments for Other IBORs

• Although the FSB recommendations were directed at LIBOR, TIBOR and EURIBOR, other members have also taken steps to reform their Place content Place content below this line existing rates in line with the advice given by the FSB and the IOSCO Principles below this line Australia Brazil Canada Hong Kong Mexico Singapore South Africa

Administrator • Australian • Brazilian Stock • Thomson • Treasury • Banco de • Association of • South African Securities Exchange Reuters Markets México (“BdM”) Banks in Futures Exchange (CETIP/BM & Association Singapore Exchange (“ASX”) FBOVESPA) (“TMA”) (“ABS”) (“Safex”)

Sponsor • Reserve Bank • Brazilian • Bank of • Hong Kong • Banco de • Monetary • South African Central Bank of Australia Central Bank Canada Monetary México (“BdM”) Authority of Reserve Bank (“RBA”) (“BCB”) Authority Singapore (“SARB”) (“HKMA”) (“MAS”)

IBOR • Bank Bill Swap • DI rate • Canadian • Hong Kong • The Interbank • Singapore • Johannesburg Rate (“BBSW”) Dollar Offered Interbank Equilibrium Interbank Interbank Rate (“CDOR”) Offered Rate Interest Rate Offered Rate Average Rate (“HIBOR”) (“TIIE”) (“SIBOR”) (“JIBAR”)

Reference • Transactions- • Methodology • No changes • Ongoing • BdM staff have • Considering • SARB Rate Update based was reviewed in currently being assessment & recommended enhancements published methodology July 2016 made to the consultation TIIE reforms to to methodology report in Jan. commenced in CDOR paper align with and alternative 2018 clarifying • DI rate May 2018 IOSCO benchmarks governance for anchored on the • Pursuing a • Potential to Principles JIBAR • Proposed to Selic rate multiple rate reform HIBOR • Waterfall strengthen fall • No intentions to methodology to • May refine • A monitoring approach with • May take a back discontinue TIIE be implemented SABOR to group exists at CDOR, CORRA “waterfall” of arrangements rate by 2019 become main the BCB to (overnight RFR) information unsecured discuss other and term input • Need to develop overnight rate initiatives CORRA OIS market Source and Footnotes Guideline Source: FSB Progress report on implementation of July 2014 FSB recommendations FSB Progress report on reforming major interest rate benchmarks (Nov. 2018) 16

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