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KPMG – President Biden, Brexit and what’s next for British-American Business Council

President Biden, Brexit and what’s next for British-American Business Council

[British-American Business Council (BABC) Board Member and KPMG U.S. Principal Paul Harnick recently joined KPMG U.S.-U.K. Corridor Leader Howard Wiener and KPMG U.K.’s Michelle Quest for a discussion on the potential impact of the new U.S. administration’s policies and Brexit on BABC members’ business.]

Paul: What is the Biden administration’s proposed tax plan and what could it mean to a BABC member business?

Howard: During his campaign, Biden emphasized the need for certain policy changes, including infrastructure, clean energy, domestic manufacturing, rebuilding U.S. supply chains, housing, racial inequities, childcare, elder care and health care. To offset the costs of these goals, President Biden proposed changes to the Tax Code. President Biden’s campaign tax proposals were brief and high level. A few of the highlights affecting businesses and individual investors include:

  • Increase the top statutory corporate income tax rate from 21% to 28%
  • Create a new 15% corporate minimum tax on global book income of $100 million or more
  • Increase the tax rate on certain foreign income from 10.5% to 21%. Increase individual tax rates to 39.6% and tax capital gains and dividends for individuals with over $1 million in income at ordinary income rates

Over the coming months, we can expect additional proposals, as well as refinements to proposals, to be made. With Democratic control of the House of Representatives and effective control of the equally split Senate, Democrats are in control of the U.S. legislative agenda. However, whether, and to what extent, tax legislation will be passed is far from certain. As a general matter, Senate filibuster rules require 60 votes for legislation to be considered for a vote, and convincing at least 10 Republicans to vote with the Democrats will be an extremely tall order. It’s important to note, though, that special “budget reconciliation” procedures allow some types of legislation, including tax legislation, to move through the Senate by only a majority vote without being subject to a filibuster. Yet, even in this scenario, the Democrats would need all 50 Democratic senators to agree to any legislation. This effectively leaves every Democratic senator with the power to veto any proposal. Given the broad spectrum of political philosophy among Democratic senators, one could expect negotiations and compromise around any proposals made by President Biden.

Paul: Can we expect a change in U.S. trade policy under a Biden administration?

Howard: Joe Biden has made clear that any trade deal between the U.S. and U.K. must be contingent upon respect for the Good Friday Agreement and prevent the return of a hard border. Given the current economic climate and uncertainty around the pandemic, it is unlikely that a U.K./U.S. trade deal will be done quickly. However, we can expect there will be further efforts to improve the U.K./U.S. economic relationship in the coming months and a deal in 2022 looks possible. More generally, there are not expected to be major trade liberalizations under a Biden presidency. The last few years have seen the U.S. taking a much harder stance on its trade relationship with China. This has been bipartisan.  Although the tone will likely change, many of the concerns of the Trump administration with respect to China are shared by President Biden and the Democratic Party.

Paul: Shifting to our other topic today – Brexit. Michelle, what has been the outcome?

Michelle: Since the U.K. voted in a national referendum to leave the European Union (EU) in 2016, businesses that operate between the U.K. and the EU have faced a significant level of uncertainty. Negotiations between the U.K. and EU ended in agreement on Christmas Eve to conclude the EU/U.K. Trade and Cooperation Agreement. The agreement now governs the economic and trading relationship between the U.K. and the EU.

The fact that an agreement was reached will be welcomed by many BABC members as it provides more certainty. However, businesses need to be aware that the agreement will not result in a static relationship between the U.K. and the EU. The agreement sets up a significant governance structure which will negotiate and determine how the agreement will be implemented. In particular, issues around financial services and data adequacy will be subject to further discussion. Furthermore, there is an automatic review of the agreement every five years.

Paul: What has been agreed?

Michelle: The agreement might be described as “skinny.” It focuses predominantly on goods, with most U.K. and EU goods not subject to tariffs or quotas.

There is little in the agreement for services. The provisions do not go much beyond existing EU practice, and, as a result, there will be challenges for service businesses to trade between the EU and the U.K.

Many citizens’ rights issues had already been covered in an earlier agreement and EU citizens living in the U.K. have until the end of June 2021 to secure their rights. BABC member businesses with mobile workforces need to be aware of the impact as the agreement ends the ‘freedom of movement [of people]’ between the U.K. and the EU.

Certain regulated sectors no longer have “passporting” rights, such as businesses operating in the pharmaceutical and financial services sectors.

Paul: What is the customs impact?

Michelle: The process at the U.K. and EU border has fundamentally changed. Customs declarations are now required on either side of the border and businesses will have to put further preparations in place, including holding registrations and having the data to support these declarations.

While the agreement means duty- and quota-free access to both markets, this applies only for goods that meet specific rules of origin. BABC member businesses should assess the impact of the rules of origin.

There are specific impacts from a customs perspective for Northern Ireland (NI). Customs duty will be due on British goods “at risk” of movement to the Republic of Ireland. A new UK Trader Scheme has been introduced.

Paul: What are the tax implications?

Michelle: The U.K. no longer has access, or needs, to comply with EU tax directives. In some cases, this may lead to additional taxation on certain transactions (for example, some inbound payments may be subject to withheld tax in the paying jurisdiction). The U.K. is no longer implementing DAC6 (the mandatory reporting rules) to the same extent as continuing EU members. U.K. implementation has been limited to one of the five categories (relating to information exchange and beneficial ownership).

The agreement contains provisions for coordination of social security. U.K. nationals travelling, working or living in the EU (and vice versa) will retain entitlements to some benefits. Cross-border workers and employers will only be liable to pay social security contributions in one state at a time.

Paul: What tax implications should BABC members be particularly aware of?

Michelle: There are several provisions in the U.S.-U.K. tax treaty favorable to U.K.-headed companies that require a party to be a resident of an EU member state. Ownership structure where U.K. companies have availed themselves to such provisions must be reviewed. Although there is hope that the U.S. and U.K. will negotiate amendments to account for Brexit, given the myriad of priorities announced by the Biden administration, any changes would not be expected in the short term.

Furthermore, in certain circumstances, consideration of the Limitation of Benefits clause of U.S. treaties may be necessary even where the payer or recipient is not a U.K. resident.

Paul: What is the impact on the U.K.’s economic outlook?

Michelle: KPMG estimates that with a trade deal between the U.K. and EU, U.K. GDP growth in 2021 could total 6.1%. If the U.K. had left the EU without an agreement, KPMG estimates U.K. GDP growth would have been lower, at 3.3%.

Paul: Are there any other impacts?

Michelle: The impacts of the U.K. leaving the EU are wide-ranging and the information we have covered during our discussion only briefly touches on a few of them. Given that the relationship between the U.K. and EU will not be static, businesses should follow developments, particularly in the coming months as the agreement is being implemented.

The Philadelphia Convention & Visitors Bureau

As the official tourism promotion agency for the City of Philadelphia, the Philadelphia Convention and Visitors Bureau is focused on positioning Philadelphia for success once international travel resumes, and the city can once again welcome overseas visitors.

To help facilitate recovery for the city’s hospitality and tourism businesses, the PHLCVB launched the PHL Health Pledge in partnership with the City of Philadelphia, the Commonwealth of Pennsylvania, the region’s renowned life sciences and medical community and institutions, along with the city’s hospitality business partners. Working together as one, Philadelphia’s hospitality community is displaying unstoppable ingenuity to ensure a safe return to travel, meetings, and events – key messages displayed in the PHLCVB’s new Unstoppable Philadelphia video.

PHL Health Pledge

The PHL Health Pledge is a long-term strategy that aligns the expertise and guidance from the PHLCVB’s Chief Health Advisor, Dr. David Nash, Dean Emeritus of the Jefferson College of Population Health and the PHL Health Advisors to establish best practices for reopening. The initiative demonstrates how Philadelphia is working together to introduce new clean and safe guidelines and leveraging our world-renowned life sciences industry by drawing upon their expertise to provide guidance and advice on how our tourism community can safely welcome visitors. The initiative is comprised of three key components:

  1. PHL Health Advisors, including:
    • Dr. Nash, serving as Chief Health Advisor, provides guidance directly to meeting planner customers and serve as a public spokesperson on behalf of the PHLCVB with regards to matters of public health and tourism.
    • The 20-member PHL Health Advisors sub-committee of PHL Life Sciences, act as an internal support team, providing guidance to the PHLCVB and our hospitality partners on health and safety standards as well as information on local medical advancements in the fight against COVID-19
  1. Resources for Safely Reopening:
    • Aggregated list of plans from national partners like U.S. Travel Association as well as many local tourism partners for review by potential visitors
    • PHL Hospitality Health Pledge signed by PHLCVB members and other local tourism-related businesses to show their commitment to new health and safety standards as they reopen for business. To date, over 100 PHLCVB members have signed the pledge, including hotels, restaurants, attractions and other businesses in the region. For a full list of members who have committed to a unified reopening of the city, visit PHL Hospitality Health Pledge.
  1. Continuing Education and Innovation:
    • On-going training and support for PHLCVB members to keep abreast of public health best practices to keep their hotels, attractions, and venues safe for visitors. Notably, the PHLCVB hosted a webinar for key customers with Dr. Nash, providing them with an opportunity to ask pertinent questions on how our industry should be adapting to changes brought on by the public health crisis.

Impact of Overseas, UK Visitation to Philadelphia

In 2019, there were over 76,000 hospitality-related jobs in Philadelphia County alone in 2019, making the industry one of Philadelphia’s largest and fastest growing employment sectors. Specifically, overseas visitation is critically important to Philadelphia’s overall leisure travel mix as overseas visitors tend to stay longer and spend more money while in market.

In 2018* the United Kingdom was Philadelphia’s #1 source market for overseas visitation, with over 112,000 visitors traveling to the city, and contributing over $91 million in direct spend. Prior to COVID-19, UK inbound-travel to Philadelphia grew by 3.4% from 2017 to 2018 with most UK visitors to Philadelphia arriving into PHL International. Visitation growth from the UK was supported by direct airlift to PHL from London, Manchester, Shannon and Edinburgh on American Airlines, and from Dublin on Aer Lingus.

For more insights on overseas visitation into Philadelphia and the economic impact on the leisure travel segment, view the PHLCVB’s Research and Resources.

Brexit: Forging the New U.K. – U.S. Relationship – Faegre Drinker Biddle & Reath

By Huw Beverley-Smith (London), Nate Bolin (Washington D.C.), Christopher Jefferies (London), David Kay (Chicago) and Remy Nshimiyimana (Philadelphia)

The United Kingdom (U.K.) left the European Union (EU) on 31 January 2020. Under the U.K.- EU withdrawal agreement, a transition period will end on 31 December 2020 (unless it is extended). During the transition period the U.K. will continue to participate in the single market and customs union and will otherwise be treated as if it were still an EU member state. For its part, the United States (U.S.) has shown strong interest in strengthening ties with the U.K on trade and a host of related regulatory and national security issues, many of which have strong bipartisan support in the U.S. Congress.  As a result, a possible U.S.-U.K. trade agreement is likely to be a priority for the U.S. regardless of the outcome of the upcoming November 2020 presidential election.

For the U.K. Government, the end of the transition period is politically symbolic, and it has been reluctant to extend it. Although the negotiations between the EU and U.K. are continuing remotely, the coronavirus pandemic has significantly increased uncertainties. The economic impact of the shutdown of the U.K. economy in order to fight the coronavirus could be substantial and could potentially change the U.K. Government’s stated position and political calculations going forward. If the deadline were not extended and the U.K. were to reach the end of the transition period with no trade deal, the relationship would revert to World Trade Organisation rules. U.K. businesses would then be required to deal with the double shock of the coronavirus shutdown, as well as a complete overhaul to the terms in which they operate.  The EU is facing challenges as well, since fighting the coronavirus pandemic is testing its resources and the cohesion between Member States.

The timing of the end of the transition period is significant since it will influence the U.K.’s relationships with countries outside of the EU, including the U.S. Although the U.K. can negotiate their future trading relationships, the agreements cannot come into force before the end of the transition period without the agreement of the EU.

Global Britain Strategy

The U.K. already has more than 40 trade agreements with 70 countries around the globe through its former membership of the EU. These include significant trading partners such as Canada, Japan and Singapore. During the transition period, the agreements continue to apply as they did. However, the U.K. is working to replicate these agreements on a bilateral basis so that they will continue to apply after the transition period. As of December 2019, the U.K. has succeeded in replicating the agreements that cover 8.3% of its current trade, with countries such as Switzerland, South Korea and the European Economic Area countries (Norway, Iceland and Liechtenstein).

The U.K. Government has also announced its intention to seek new trade agreements with the U.S. New Zealand, Australia and an updated agreement with Japan. The intention is to negotiate these in tandem. From the U.K.’s perspective this gives a great opportunity to ensure the maximum benefits from each trade agreement as the different territories can be played off against one another. The EU negotiating teams, for example, will know that if the EU were to increase trade frictions, then there would be scope for the U.K. to allow other negotiating partners freer access to the U.K. and so disrupt EU trade and businesses.

The U.K. has recently held a public consultation on its future global tariffs policy and an announcement on what this will be is expected shortly. Once set, this new U.K. global tariff (UKGT) will cover any imports coming into the U.K. from anywhere in the world where there is no free trade agreement in place and will be the baseline for any bilateral negotiations with countries seeking a better deal.

In addition to the UKGT, some countries may want to see what the U.K.’s relationship with the EU will be before determining what they think they can achieve in a trade agreement. A further potential obstacle is that some modern trade agreements have clauses that ensure that anything offered to a third country in a new agreement must be given to the party to an existing trade agreement, if it is more beneficial. For instance, if Japan were to offer the U.K. better terms in their new bilateral arrangement, there are provisions in the existing EU – Japan agreement that require Japan to offer the EU the same terms as they offered the U.K.

Global U.S. Strategy

Under President Trump, the United States has shifted its trade strategy from broad-based multilateralism to more limited, bilateral agreements with key trading partners – as exemplified by the president’s decision to withdraw from the multilateral Trans-Pacific Partnership (TPP) on his third day in office and the conclusion of new or revised trade agreements with Japan, South Korea, Canada, and Mexico.  These agreements and related aspects of the trade policy agenda announced annually by the Office of the U.S. Trade Representative (USTR) have received wide-spread bipartisan support – a notable contrast to the reception of other planks in the president’s “America First” agenda.

Against this backdrop, the negotiation of a bilateral agreement with the U.K. – the world’s fifth largest economy and key U.S. ally – is a logical and important next step.  Moreover, it is likely to remain a top trade priority regardless of the winner of the November 2020 presidential election.  Indeed, a U.K.-U.S. bilateral trade agreement is widely seen by policy makers on both sides of the political divide as a vital bridgehead to strengthen the U.S.-U.K. alliance while increasing leverage on the EU to eliminate some historic and well-entrenched U.S.-EU trade irritants – such as agricultural policies, regulatory standards, and the on-going Boeing-Airbus trade disputes.

The U.K.- U.S. Relationship

Outside of the U.K.’s relationship with the EU, the U.K.- U.S. relationship is arguably the U.K.’s most important. According to the U.K. Government, total U.K.- U.S. trade was valued at £220.9 billion ($274.3b) in the past year which amounted to 19.8% of both countries’ exports. Although nearly half of the U.K.’s trade went to the remaining EU27 countries, making the EU as a whole the U.K.’s largest trading partner, the U.S. is the U.K.’s largest bilateral trading partner.

Depending on one’s point of view, there are differing scenarios for what comes next in the U.K. – U.S. relationship. Some analysts question whether an agreement with the U.S. could be negotiated without knowing the outcome of the EU negotiations. Conversely, others claim that because of the historical ties, the “special relationship,” and the cultural similarities in trade approaches, a trade deal could be concluded quickly. Already, there are signs that both current governments continue to favour the latter approach, with U.S. and U.K. negotiators continuing to press forward with early-stage discussions despite the disruptions caused by the coronavirus pandemic.

Adding to the complexity are the differing views within the U.K. and U.S. on what a trade agreement should achieve. Many businesses (especially from an American perspective) see a trade agreement as an opportunity to enhance American businesses’ access to the U.K. market, and to align the U.K.’s regulatory regime to the U.S. rather than the ostensibly more onerous EU rules.

For instance, the contrary views can be seen through recent public discourse in the U.K. centred around the transatlantic differences in product and food standards. The production process for chicken has been a symbolic example for the British public, but this debate could be around anything from the types of chemicals used in food production, to the use of GMOs in agriculture, and the testing of medical devices. Another politically sensitive issue is the extent to which the U.K.’s National Health Service (NHS) could be opened up to American pharmaceutical and other medical companies. The British public have indicated that they would like little to no access given to American business. Some American Members of Congress have also raised the situation with the border between Northern Ireland and the Republic of Ireland as a potential stumbling block to the future U.K. – U.S. relationship.

For these reasons, the U.K. could be placed in a difficult position and the scope for the U.K.’s pivot towards U.S. regulatory standards may be limited. However, this debate may be somewhat irrelevant to U.S. and U.K. businesses who also have operations in the EU. The so-called “Brussels Effect,” (where a company will adopt one set of standards and harmonize upwards to the highest standard (usually the EU’s because they generally are the most stringent) for their operations globally, may in practice, displace any regulatory changes in a trade deal. The theory of the Brussels Effect (a variation on the California Effect which describes the shift of regulatory standards relating to the environment, consumer products and other areas) is that there is little incentive for a company working in multiple jurisdictions to have differing standards for each place they operate. It is more efficient to comply with the most stringent and sell that product or service everywhere. The effect is seen clearly in the global application of the General Data Protection Regulation (GDPR), where some American companies apply GDPR standards to their American operations, even though they are not legally required to do so.

This isn’t to say that the U.K. will stay aligned to the EU, because the more they do, the more chance that difficulties that have prevented an agreement in the past U.S.-EU trade negotiations that took place from 2013 to 2016, could resurface in the U.S.- U.K. context.

The U.K.’s Negotiating Objectives

In early March 2020, on the day that talks between the U.K. and EU on their future relationship got underway, the U.K. Government released their negotiating objectives for the U.S. agreement. In their objectives, the Government states that they believe a Free Trade Agreement (FTA) would increase trade with the U.S. by £15.3 billion over the 15 years after the FTA comes into force. They also say that it will deliver a £1.8 billion boost to U.K. workers’ wages, as well as lowering prices on consumer goods.

The U.K. Government wants to focus on potential gains for the 30,000 Small and Medium-sized Enterprises (SMEs) across the U.K. that are already trading with the U.S., and to open new opportunities for other British SMEs. The U.K. Government says that the U.S. currently levies £451 million in tariffs on U.K. exports each year.

To achieve these gains, the U.K. Government wants to secure liberalisation of tariffs on a mutually beneficial basis (taking into consideration the U.K.’s agriculture industry) and will also seek to reduce technical barriers by removing trade restrictive measures in goods (while upholding safety standards).

The Government also says they want to reduce regulatory obstacles to facilitate market access, and also increase their trade in services by ensuring market access and fair competition for U.K. services exporters. They highlight the free flow of data (while upholding the U.K.’s standards of personal data protection) as a particular goal in this area.

A trade dispute settlement mechanism will also be negotiated to promote compliance with the agreement. However, the objective on this point is still extremely vague. This is likely because the investor-state dispute settlement mechanism was one of the most difficult topics in the EU-U.S. negotiations between 2013 and 2016. As such, the U.K. Government is trying to avoid creating too much controversy with the U.S. Government before the talks even begin.

They have stated clearly in their objectives that the NHS will never be on the table in negotiations. They are adamant that the NHS (including its pharmaceutical procurement system) cannot be opened up to the private sector, whether they are from overseas or domestically based. The U.K. Government also says that it will ensure high standards for both consumers and workers, as well as keep high standards on environmental protection, animal welfare and food standards.

Overall, on their own economic modelling, if these objectives are achieved with all tariffs and half of non-tariff barriers being eliminated, the U.K. Government projects that U.K. GDP will increase by around 0.16%. That is the best-case scenario, and in real money terms this is a significant figure. However, from the obstacles set out above, much will depend on which path the U.K. will decide to go down.

The U.S.’s Trade Objectives

The Trump Administration notified Congress in October 2018 that the President intended to negotiate a trade deal with the U.K. after it left the EU. In their negotiating objectives the Office of the U.S. Trade Representative (USTR) took as a template the recently-concluded U.S.-Canada-Mexico Agreement (USMCA) – the successor to NAFTA – which USTR has described as a “model” for future U.S. trade agreements.  Features of USMCA that are reflected in the U.S. negotiating objectives include specific limitations on operations of “state-owned enterprises” – which are included not because Canada, Mexico or the U.K. have significant state-owned enterprises, but as a bulwark to the growing presence of Chinese State-Owned Enterprises on the global stage and as investors in each of these countries.   Reducing so-called “non-tariff barriers” such as certification standards, testing requirements, and other regulatory practices is another key U.S. objective in the U.S.-U.K. negotiations.  For example, the U.S. wants to eliminate practices that are perceived to unfairly decrease U.S. market access for agricultural goods, especially the non-tariff barriers that they believe discriminate against U.S. agricultural goods. Promoting “greater regulatory compatibility” to reduce burdens within the agricultural sectors, as well as commitments for trade in agricultural products developed through biotechnologies are also on the agenda.  Beyond simply expanding bilateral trade, many in the U.S. view this objective as an important fulcrum to gain leverage over the EU in future U.S.-EU negotiations concerning the EU’s own regulatory requirements, such as the EU’s Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) system.

Trade in services is another important element of the objectives, particularly the financial services market. USTR wants to expand market opportunities for U.S. financial services suppliers, by opening up the conditions of the financial services trade and improving the transparency and predictability of the U.K.’s regulatory procedures. The U.S. seeks to ensure that the U.K. does not impose restrictions on cross-border data flows that require the use of local computing facilities. This will tie into wider agreements relating to data management, given the U.K.’s current commitment to GDPR and ensuring the protection of its citizens’ data. Similarly, the U.S. is pressing the U.K. to scrap proposed taxes on digital services.

USTR would also seek standards for pharmaceuticals and medical devices that ensure government regulatory reimbursement regimes are transparent, procedurally fair and non-discriminatory. They would like full market access for all U.S. pharmaceutical and medical products. As mentioned in earlier sections, this is likely to be a sticking point in negotiations, given the U.K. government’s position on this.

The objectives also include specific provisions relating to Intellectual Property, competition policy, environmental and labour protection. In essence, these seek reciprocal rights or that minimum standards are upheld. In some cases, such as labour and environmental laws, the US is seeking to enforce standards that are currently similar or indeed even higher in the U.K. In the case of Intellectual Property and competition law, there is already some level of reciprocity and operation of international frameworks independent from any specific bilateral arrangements that to some extent provide for much of what is sought.

Similar to the recently-concluded USMCA dispute resolution mechanism, USTR is seeking to ensure that the U.S. and U.K. Governments retain control of disputes and can promptly address situations where they believe decisions made by the dispute resolution panel are wrong.

The Future Relationship

The U.K. is entering an unprecedented new era. The U.K. Government is working on nearly every relationship it has around the globe to prepare for the moment the EU treaties cease to apply to it. This can be an opportunity to redefine the U.K.’s position, however, it is not without its challenges and risks. As the U.K. negotiates its new relationship with its EU partners, the U.K. – U.S. relationship will take on even more importance.

Trade negotiations in the new post-Brexit era have moved beyond the economics of GDP and tariffs. Achieving a trade agreement with the U.S. has become a politically symbolic goal for the U.K. Government. They will be keen to achieve an agreement in order to show that they can move beyond the EU structures. For its part, the U.S. views a bilateral trade agreement as a means to sustain and strengthen ties with its close ally and a lynchpin of future relations with the Continent.  Therefore, a U.K.-U.S. agreement is likely to remain a priority for the both governments. However, with the addition of the coronavirus pandemic on the plate of governments on both sides of the Atlantic, the outcome and timeframe are impossible to predict with certainty, as is the question whether the U.K. and U.S.’s negotiating stances will have hardened.

Club Level Feature – United Airlines

As a neighbor of the Greater Philadelphia area, United Airline’s hub at Newark Liberty International Airport offers access to nearly 400 daily flights to more than 150 destinations across the world. This includes our six daily flights between Newark and London Heathrow, which consist of a morning flight and hourly evening service between 6:00pm and 10:00pm.

The shuttle like service between these two key business destinations is operated with the newly reconfigured Boeing 767-300ER aircraft. The airplane’s cabin features 46 United Polaris business seats in the premium cabin and 22 United Premium Plus seats. Additionally, we have just introduced that Polaris customers on this route will receive complimentary baggage delivery exclusively to five Marriott International properties. Whether they are bound for the boardroom or Big Ben, this first-of-its-kind service will allow United Polaris customers to start their London journey the moment they clear customs and drop their bags.

The baggage delivery program is offered to all customers who hold a ticket in United’s Polaris business cabin on the New York/Newark to London Heathrow route, including upgraded tickets, and who are staying at select Marriott properties including JW Marriott Grosvenor House London, London Marriott Hotel Canary Wharf, London Marriott Hotel County Hall, Sheraton Grand London Park Lane and St. Pancras Renaissance Hotel London. Customers can proceed through immigration and customs as normal, and follow signs for the bag drop desk in the arrivals area of London Heathrow, which is open seven days a week from 6:00am – 12:00pm. Customers will not need to pre-register for the service. As an added benefit, passengers who are also members of Marriott Bonvoy, Marriott’s travel program, and have booked their hotel stay directly with Marriott will receive a notification on the Marriott Bonvoy app that their bags have arrived at their hotel.

The reconfigured Boeing 767-300ER aircraft features 16 additional United Polaris business class seats – a more than 50 percent increase in all-aisle-access seating – bringing the total premium cabin seat count to 46. The aircraft will also feature 22 United Premium Plus seats; 47 Economy Plus seats and 52 Economy seats. United operates the reconfigured 767 – which features the highest proportion of premium seats on any widebody aircraft operated by any US carrier – between Newark/New York and London, offering more premium seats in the largest premium route in the world.

United Polaris business class service is designed to bring a new level of quality to every aspect of premium cabin travel –from lounge to landing – and provide the best sleep in the sky. Customers booked in the Polaris cabin will continue to receive signature amenities such as Saks Fifth Avenue bedding, amenity kits featuring custom products from luxury skincare line Sunday Riley, a variety of inflight entertainment options, elevated food and beverages and access to the Polaris lounge at Newark Liberty International Airport and the arrivals lounge and United Club at London Heathrow.

The newly launched United Premium Plus seats are located closer to the front of the aircraft, directly behind Polaris. Customers traveling in United Premium Plus receive Premier Access check-in, complimentary checked bags, larger and more spacious seats, an upgraded dining experience, an amenity kit, Saks Fifth Avenue bedding and more.

United is focusing more than ever on its commitment to its customers, looking at every aspect of its business to ensure that the carrier keeps customers’ best interests at the heart of its service. United recently announced that customers on all domestic flights can now choose from three complimentary inflight snack items; announced that luxury skincare line Sunday Riley will make products exclusively for United customers to experience in amenity kits; released a re-imagined version of the most downloaded app in the airline industry; introduced ConnectionSaver, a new tool dedicated to improving the experience for customers connecting from one United flight to the next; and made DIRECTV free for every passenger on 211 aircraft, offering more than 100 channels on seat back monitors on more than 30,000 seats.

For additional details on the London baggage delivery program please visit:

Club Level Feature – Citrin Cooperman

Citrin Cooperman’s International Tax Services Practice Navigates the Complex Environment Affecting Transatlantic Business

With an unpredictable political and economic landscape, strategic planning today for businesses and individuals alike is a great challenge.  Between Brexit uncertainties and possible looming trade war, the global marketplace is on the edge of their seats, trying to predict the future, and, of course, hedge their bets as to making sound business decisions. Without a doubt, the effects of these events will change the economic environment for years to come, with major implications for international businesses.  Are you prepared?

With increasing complexities in regulations and compliance, Citrin Cooperman has invested heavily in resources to plan and assist our current and future international clients.  In the past few years, we have expanded our International Tax Services Practice, launched a dedicated Transfer Pricing Practice, and added an office in London, England to better serve the global market.  Our team, led by Partner and Practice Leader Leon Dutkiewicz, Jr., speaks over 25 languages and provides our clients with consulting and compliance services including advisement on transfer pricing, structuring and restructuring, cross-border transactions, international tax planning, and more.

For high net worth clientele, Citrin Cooperman takes a holistic, multi-faceted approach focused on multi-generational tax planning and compliance, financial services advisory, insurance and risk management, tax controversy, and audit representation, as well as family office and back office services.

Contact a Citrin Cooperman International Tax Services team member today to learn more about how we can help you and your businesses achieve your goals all the while planning and preparing for the changes to come.  Visit our website at for more information on our services.

About Citrin Cooperman: Citrin Cooperman is among the largest, full-service assurance, tax, and business advisory firms in the United States, having steadily built its business serving a diverse and loyal clientele since 1979. Our daily mission is to help our clients “focus on what counts.” Rooted in our core values, we provide a comprehensive, integrated business approach to traditional services, which includes proactive insights throughout the lifecycle of our clients wherever they do business, across the globe.  Citrin Cooperman is an independent firm associated with Moore Stephens International Limited.

Club Level Feature – McConnell Johnson Real Estate, LLC

BABC member, McConnell Johnson Real Estate, Earns Delaware’s first WiredScore Platinum Certifications

McConnell Johnson Real Estate and WiredScore, the pioneer behind Wired Certification, the international standard for cutting-edge internet connectivity in office buildings, recently announced the first certified properties in the state of Delaware.

The pair of office towers on Wilmington’s North Market Street joins the more than 1,700 Wired Certified buildings worldwide that offer top-notch tech capabilities. The designation was assigned upon review of the buildings’ best-in-class connectivity, technological infrastructure and readiness to adopt to emerging technologies. Both office towers, 1201 & 1313 North Market Street achieved the certification’s highest level, Wired Certified Platinum.

Platinum Wired Certification represents the best-in-class standard of in-building connectivity, infrastructure, and readiness. The Empire State Building, Willis Tower in Chicago, and the Shard in London are some of the world-class properties that have achieved this recognition. Collectively encompassing nearly 1 million rentable square feet, these properties offer a range of amenities to tenants including generous floorplates, on-site conference and fitness amenities, abundant parking and walkable access to nearby retail amenities.

These properties benefit from an extensive investment in fiber-optic expansion in the State of Delaware fueled by private investment and grants provided by DEDO and DTI to help accelerate deployment of key fiber-optic routes. This combined investment has created a dense fiber-optic network in Delaware with 1201 & 1313 North Market Street acting as a key HUB site with strategic access to domestic US routes and trans-Atlantic cable landing point on the east coast.

The establishment of a hub for carrier routes at 1201 North Market Street allows for fiber-optic connectivity to a broad range of key markets as well as significant local and regional connectivity. In addition to over 250+ fiber miles in the State of Delaware and extensive reach in New Castle, Kent and Sussex counties. 1201 N Market also acts as a regional HUB for connectivity to 2000+ miles of fiber in bordering PA and NJ with critical low latency routes south to key data centers in N Virginia, north to Philadelphia, NYC and Boston, west to Pittsburgh, Chicago and the west coast.

“The WiredScore Platinum independent certifications for 1201 and 1313 creates better transparency for those tenants that are dependent on the digital economy for future growth,” said Scott Johnson, Partner of McConnell Johnson Real Estate.

“We’ve now clearly entered a time in which an uninterrupted digital experience has become non-negotiable for office tenants to feel empowered and productive,” said Arie Barendrecht, CEO and founder of WiredScore. “As the first properties in the state of Delaware to pursue and earn Wired Certification, 1201 and 1313 North Market Street stand out as forward-thinking properties in the region and can clearly demonstrate a commitment to digital connectivity.”

In pursuing Wired Certification, the properties underwent a comprehensive certification process that evaluated the aspects of digital infrastructure that enable a seamless connectivity experience in which office tenants are able to stay online and maintain productivity levels.

Upon review of the project’s technical elements including: internet service providers available to tenants, infrastructure redundancy, connection access points, and readiness to meet future tenant needs, a Wired Certification level is assigned based on the official standards developed by WiredScore and its connectivity advisory board with representatives from Google Fiber, Rudin Management, Arup, WSP / Parsons Brinckerhoff, and Zayo Group.


McConnell Johnson Real Estate is a leading acquisition, development, and management company with commercial and industrial properties throughout the Mid-Atlantic region. The company’s unwavering commitment to service excellence has attracted and retained first-class tenants, and McConnell Johnson prides itself on a strong dedication to fostering respect and stewardship for business, economic, and community leadership.  In 2018, McConnell Johnson Real Estate’s 1201 N. Market Street and 1313 N. Market Street properties received the area’s first platinum ratings from WiredScore, recognizing its dedication to next-generation connectivity needs. For more information about McConnell Johnson Real Estate, please visit or call (302) 421-2000.


WiredScore is the organization behind Wired Certification, the internationally recognized digital connectivity rating system for commercial real estate that helps landlords design and promote buildings with powerful digital connectivity.

Wired Certification champions cutting-edge technology in commercial real estate by providing the only certification for rating the infrastructure, connectivity and technological capacity of commercial buildings. WiredScore launched Wired Certification in 2013 in partnership with Mayor Bloomberg and the City of New York; in October of 2017, an investment group led by Bessemer Venture Partners and Fifth Wall acquired the company’s majority share.

In an increasingly tech-driven economy, connectivity is fast becoming the most critical factor for tenants when selecting office space. The widely recognized Wired Certification seal is a trusted symbol that identifies buildings that have been independently certified to provide the best-in-class connectivity infrastructure that businesses require to thrive. For more information on Wired Certification or to find Wired Certified buildings, visit:




Club Level Feature- Johnson, Kendall & Johnson

JKJ: Let’s Make the World a Smaller Place

For global organizations, the management of risk is constantly evolving. Assessing risk cannot be compartmentalized to the standards and norms of the parent company’s country laws, regulations, operations, and litigious environment. JKJ’s risk assessment factors in many entities, countries, governing bodies, and exposures. We work with global organizations around the world on the avoidance, prevention, retention, and transfer of risk when the business is managing risk in conjunction with their US domiciled entity through commercial insurance programs and risk prevention practices.

JKJ’s model to service client locations across the country from a centralized location is an important attribute of our international business model. We have the licenses required in all 50 states for admitted and non-admitted placements, but also, our team is able to be at client locations regardless of where the location may be. This model allows us the flexibility to service subsidiary locations anywhere in the country and focus on developing a high level of competency with a centrally located team. We travel frequently outside the US to meet with executive management teams, risk managers, or ownership of foreign parent companies as part of the global interaction. A primary factor to perpetuate this model is our commitment to remaining independent. By remaining private and independently owned, we can focus on driving resources back to the benefit of our clients rather than outside stakeholders.

We focus on four primary areas for our international clients which are: Communication, Culture, Coordination, and Compliance.

Through our prior experiences in international transactions we find there is a significant opportunity of creating value to parent and subsidiary companies by beginning with the understanding of the differences in culture and customs of transacting business in each country. Addressing these differences with an integrated solution can be cost effective and coverage efficient for our clients.


We focus on transparency for all parties including local management, foreign brokers, executive headquartered management teams, etc. This enables us to properly understand all elements of a risk profile and equipping the global group to make sound business decisions. Transparency is key; ambiguity and vague interpretations lead to miscommunication and ill-informed business decisions.

Managing risk globally must be a collaborative effort and requires answering tough questions which often go unasked. This lends to our philosophy that in person meetings are vital. This leads our team to traveling the world for meetings with company headquarter and subsidiary locations.

Traditional solutions for multi-jurisdictional locations have been to find a broker in each respective country who can countersign the local policies and provide very basic insurance services, but generally, international networks still focus on “dots on the map” rather than a rigorous analysis of organizational attributes of the broker partners.


We have committed time and resources to better understanding other cultures which attribute to our clients’ perspectives and needs. Through our experience we understand and respect how people from other cultural backgrounds relate to issues in unique ways. Not only is there an intentional internal study to cultural disconnect, but through decades of frequent international travel we better understand differing cultural norms compared to most American service providers.

Understanding the impact of cultural disconnects can be disastrous in structuring international insurance programs if not considered properly. We recognize that Americans do not think, behave, or process information the same as people in different countries and adapt as best as we can to those varying perspectives.


The result of poor communication creates misunderstanding relative to coordinating respective risk management programs in each country. The effective outcome is often gaps in coverage, and the mistaken assumption the terms and conditions provided are “best local standards” automatically provided in all countries. This is aggravated by the fact insurance companies at times refuse to provide translations of local policies in both languages, leading to confusion on the intent of coverage a client was looking to obtain.

Respective regulations and legal requirements are often misunderstood, and they continue to become more complicated in this period of government oversight.

In addition, there can be disconnects as a result of currency exchange rates relative to coordinating retentions and limits of coverage and insurance premium taxes are rarely coordinated appropriately with each subsidiary’s country.

Coordinating insurance programs in and of itself is complex, and to most appropriately leverage the scale of the global organization must be completed with professionals who have a global enterprise risk management approach which optimizes scope of coverage and cost efficiencies.


Compliance is quickly becoming a major issue in cross border transactions. Issues are centered on tax obligations, revenue recognition, data protection, and appropriate allocation of expenses. Several cases in the EU and in the USA underscore new compliance standards for both insurers and policyholders relative to allocation of premiums and payment of the current VAT or premium taxes. There are also the accounting issues relative to payment of a claim in one country for a loss that occurred in another country.

Furthermore, evolving data breach laws, regulation, and litigation is forcing a proactive approach on prevention and transferring this risk through insurance.

Duplicate insurance coverage in each country with operations can be a significant problem in the event of a claim with coverage provided by the insurance program in another country. This creates problems in arranging defense and determining which insurance program is the primary insurer. Duplicate coverage is problematic for effective protection against risk for the international organization.

Industry Focus

Although there is a broad scope of industries served within JKJ’s international practice, below are some of the higher concentration areas in which our clients’ businesses are classified. At JKJ we are most effective when our clients are fully engaged with all divisions of our JKJ team, including claims management experts, risk engineers, internal account managers, representatives, and JKJ’s online portals.

    • Manufacturers
    • Advanced Manufacturing
    • Food
    • Distribution & Wholesale
    • Retail
    • Technology
    • Professional Sports
    • Life Sciences

JKJ Service Approach

Some elements of risk management and insurance are specific to US operations and entities. JKJ works hard to best integrate solutions into a global approach for multinational client organizations. The client has an important role including employee retention, reducing operational risk, premium cost mitigation, and the business perpetuation.

As an independent, employee owned company we are focused on driving value back to our clients. JKJ’s international team, although specialized in handling multinational organizations, integrates directly with the staff and services of our successful JKJ model.

  • Risk Engineering – JKJ’s risk engineers interface with our clients’ safety initiatives for our clients to reduce independent consultant costs by navigating the complexities of OSHA regulations, and implementing preventative programs to control the total cost of occupational injury risks.
  • Claims Management – JKJ’s claims consultants act as a client advocate to insurers who are going through claims. We help with coverage analysis, open reserve analysis, and the management throughout the life of a claim with our insurer partners.
  • Contractual Risk Transfer – a primary form of risk management in the US is through contracts. We actively participate with clients’ internal and outside legal teams to transfer and limit risk by way of contracts.


Bruce F. White, CPCU
Vice President Insurance Services
Johnson, Kendall and Johnson, Inc.
109 Pheasant Run
Newtown, Pa 18940
Phone: 215-968-4741

Club Level Feature- Cigna

Cigna Global Health Benefits® Business-to-Government: Caring for Foreign Government Personnel around the World
In a rapidly changing world, foreign governments need an experienced partner to keep their citizens well.  

The Air War College in Montgomery, Alabama is the senior US Air Force professional military school. Its instructors educate American military and agency personnel, as well as thousands of non-US residents from 41 nations around the globe. It was at a global military college such as this that a young Afghanistan solider was studying when he took a motorcycle ride that would change his life – and demonstrate the value of having comprehensive health and well-being coverage provided by his home country’s government.

When medics arrived on the accident scene, it was clear that the young solider was paralyzed from the waist down and that there was a language barrier. Fortunately, when hospital staff contacted Cigna Global Health Benefits (GHB), the injured man’s insurance provider, they were able to quickly connect with Arabic-speaking team members who translated, explained the US healthcare system process to our client, coordinated his care and reassured him at a frightening time.

Foreign Government Responsibility for Citizenry

Foreign governments, embassies, and consulates regularly send their employees and citizens abroad for a variety of reasons, including regular employment and mission work, to receive medical care and to further their education. In these instances, the foreign government has a responsibility to ensure the safety and welfare of its citizens abroad.

Assigning foreign government personnel and their families abroad is one of the most critical decisions a country has to make, and selecting appropriate healthcare coverage is an integral part of this decision.

Cigna GHB’s Business-to-Government Team

Cigna, a Fortune 100 global health insurance company providing superior quality healthcare, clinical management, and wellness solutions to more than 95 million customers across 200 countries around the globe, works with customers to help them lead a healthy life with personalized health and wellness services and solutions. Our global reach guarantees our clients with 24/7 customer support, multilingual call centers located in nine global locations, specialized clinical services, and access to 1.5 million medical and healthcare professionals and facilities worldwide.

With more than 25 years of experience in providing health care solutions to foreign governments, Cigna’s Business-to-Government segment includes customized, locally compliant health coverage solutions that cater to travelers and globally mobile assignees who require coverage for health issues ranging from routine care to life-threatening medical emergencies while outside of their country of residence. Trained to be culturally sensitive and to service the whole client, Cigna’s Business-to-Government team is the healthcare solution of choice for foreign governments around the world.

Dedicated Care – Anywhere

The Cigna Business-to-Government team is comprised of an integrated, multi-lingual, dedicated sales and service delivery model to interface with foreign government personnel and staff in person and virtually, ensuring that the right mix of healthcare solutions are implemented and aligned to meet their employees’ needs. Cigna Global Health Benefit’s expansive network of leading healthcare professionals around the globe, with direct provider payment arrangements, uniquely positions us to provide dedicated care from 30 global offices.

Specialized Solutions & Commitment to Service

Designed to meet the needs of clients on long- or short-term global assignments, Cigna’s Business-to-Government offering is unique in the industry. We offer the following benefits to qualified Business-to-Government clients and their family members:

  • Medical, dental and vision coverage
  • Pharmacy coverage
  • Life/accidental death and dismemberment/long-term disability coverage
  • Global TeleHealth – A mobile app that provides 365/24/7 a week secure access to board-certified doctors with private online, and live appointments via video or phone.
  • Pre-assignment assistance – Early assessment, planning, ongoing support and expert coaching to keep globally mobile clients healthy and productive.
  • International Employee Assistance Program – Free 365/24/7 a week confidential assistance with any work, personal or family issues.
  • Medical evacuation (provided through a partnership with ISOS) – Emergency evacuation and transportation when there is an immediate threat to life or limb.
  • Medical Benefits Abroad (MBA) for International business travelersCoverage for injuries and illness incurred while traveling on government-sponsored trips away from home.

Real Life Care – for the Journey

Whether you’re looking for healthcare solutions in the United States or expanding your country’s interest around the world, the Business-to-Government team at Cigna GHB has the products, services and dedicated professionals to ensure your peace of mind.

To learn more, please visit or contact:

Amir Aziz

Senior Client Manager, Cigna Global Health Benefits

111 S. Calvert St.

Baltimore, MD  21202

Mobile:  410-952-6409

Fax:     860-730-3929

Club Level Feature – American Airlines

The Year of PHL for American Airlines

We started 2018 by sharing memorable moments with our partners at the airport and with our city leaders. As we sent fans to Minneapolis in style to cheer on our World Champion Eagles, we also engaged City Council in the fun with our rally towels that were waived in excitement while councilmembers sang “Fly Eagles Fly.”  Additionally, we experienced a humbling moment at the start of the year by reaching a milestone with our PHL cargo team.  By January, they had carried more than two million pounds of critical supplies to Puerto Rico for hurricane relief efforts – the most throughout our American network in the northeast corridor.

These early achievements and impactful benchmarks reinforce why 2018 is the year of PHL for American Airlines. We have so many exciting initiatives that will continue to reaffirm our status as both American’s transatlantic gateway and Philly’s Hometown Airline.

Starting this spring and summer, we will have 11 new routes—three international and eight domestic — that will connect people to the Philadelphia region and beyond. Our new international routes include: Budapest, Hungary; Prague, Czech Republic; and Mexico City, Mexico. Our new domestic routes include: San Antonio, TX; New York, NY; Des Moines, IA; Madison, WI; Omaha, NE; Fort Wayne, IN; Oklahoma City, OK; and Pensacola, FL.  Additionally, we resumed our service to Zürich, Switzerland on March 25.

As we continue to add more nonstop destinations to strengthen our position as American’s transatlantic gateway, we will broaden our regional economic impact and help make the Greater Philadelphia region an even more vibrant place to visit, live and work.

Whether it is above or below the wing, one of our top priorities is to identify ways to improve work environments for our 8,000-plus hardworking PHL team members. This year, we are making culture a competitive advantage. We are refreshing workspaces and meeting rooms and providing the tools and training our work groups require. More importantly, we are supporting team members on their initiatives that strengthen our diversity inclusion and cultural awareness.  In January, our newly formed Latin Diversity Network (LDN), one of American’s many Employee Resource Groups, flew to Puerto Rico to distribute over 200 toys which they collected from PHL team members.  The PHL LDN is also providing Spanish lessons to our team members to help them learn the airport lingo and better assist travelers.

We aim to give our team members everything they need to succeed, as they are our most important assets. As such, we look forward to continuing to work with our public and private partners to make PHL and the Greater Philadelphia Region an attractive place for residents and visitors alike.

We welcomed Folasade (Sade) A. Olanipekun-Lewis in February to our PHL team as the new Regional Director for Government and Airport Affairs. Sade joins us from the Philadelphia Division of Aviation, where she served as Chief Administrative Officer.  Before that, Sade worked as the Deputy Commerce Director for Finance and Administration for the City of Philadelphia, and as the Chief Financial Officer for City Council.

In her new role, Sade will help advance American Airlines’ regional legislative issues. She will also be responsible for real estate matters at the Hub and station levels that support operational activities.

We’re excited to have Sade with us, and her experience in aviation and the public sector will be paramount as we continue to forge the necessary relationships to position PHL as the premier airport in the northeast corridor.


Olympia Colasante, Vice President – PHL


Club Level Feature

TD Securities
Libor: An Inconvenient Truth

In recent months the future of Libor has been the subject of intense debate. While the topic has been intermittently discussed since the financial crisis, when it became clear that Libor fixings were not in line with bank funding conditions, the debate has sharply intensified in recent months. July remarks by Andrew Bailey of the Financial Conduct Authority (FCA) — the regulator of Libor — jolted the market and spurred many participants into taking the transition away from Libor more seriously.

Libor is a public good…until 2021
The FCA has regulated Libor since 2013 and has made significant improvements to the rate through its administrator, ICE Benchmark Administration (IBA). IBA and the twenty panel banks that submit contributions have introduced changes in the quality of governance around submissions, aiming to anchor submissions to transactions. However the underlying market that Libor seeks to measure — the market for unsecured wholesale term lending to banks — is no longer active. According to ICE, fewer than 30% of USD 3m Libor submissions are based on transactions.
Meanwhile, many banks reportedly wished to withdraw from being a Libor submitter. Such a move would severely weaken the representativeness and robustness of the rate, potentially creating a domino effect that leads more banks to leave the panel. UK and European legislation only gives regulators limited power to compel banks to continue submitting to Libor. In the case of the European Benchmark Regulation, the “compelling power” is only one to two years. However, FCA’s Bailey and Fed’s Powell have suggested that banks have volunteered to stay on as submitters until 2021, giving the industry time to transition to a new benchmark.

What happens after 2021?
Part of the reason that the 2021 deadline was set is that the FCA believes work on a transition is unlikely to begin in earnest if market participants assume that Libor will last indefinitely. The fate of Libor after the end of 2021 is up to the IBA and the panel banks. They could continue to produce the rate, but because the FCA cannot oblige panel banks to stay, the robustness of Libor could deteriorate.
Global regulators have meanwhile blessed a number of alternative benchmark rates. All of the rates chosen globally to replace Libor have the benefit of being anchored in much more active markets than term Libor, involving little expert judgement. Additionally, in order to resolve the issue of which members to put on a rate-setting panel, these alternative rates use data from all relevant market participants.

SOFR So Good
The NY Fed is expected to release the SOFR rate in Q2 2018 along with two other rates based upon trade-level data from various segments of the repo market. Fed Chair Nominee Powell blessed SOFR in a recent conference, noting that, “The alternative reference rate needs to be able to stand the weight of having trillions of dollars written on it, and the ARRC has definitely met this standard in choosing SOFR.” The transactions underlying SOFR total nearly $700bn/day — much larger than the volumes in overnight unsecured markets and even larger than Treasury bill trading volumes. Powell’s endorsement of SOFR is the first time that a US regulator has been so explicit about the move away from the current Libor benchmark. Note that an estimated $160tn of contracts are linked to Libor and 90% of the that is linked to USD Libor. In August the Fed Board invited public comment about the plan for producing these rates.

These rates will improve transparency into the repo market by increasing the amount and quality of information available about the market for overnight Treasury repo. The rates will be volatile by construction, but given how many transactions these rates incorporate, it will be difficult for any one market participant to influence the rate. The tri-party rate will effectively be the offer side of the market and will be less volatile.

How is SOFR calculated?
The NY Fed proposes using a volume-weighted median as the central tendency measure for SOFR, which would be consistent with the methodology used for the Effective Federal Funds Rate (EFFR) and Overnight Bank Funding Rate (OBFR). In the event of an even number of transactions in the data set, the median would be considered to be the higher of the two numbers (i.e., it would be rounded up). There is a case to be made for a volume-weighted average (geometric or arithmetic mean) rather than a median since SOFR might have a bimodal distribution. One peak would represent relatively low tri-party rates and a second peak would reflect GCF and DVP GC transactions. The median of a bimodal distribution could be more volatile from day-to-day than a traditional volume-weighted arithmetic average if the valley between the two peaks is flat and low. Depending on the shape of the distribution, small changes in the relative volumes of the two peaks can result in significant shifts in the median rate.

All repo transactions that are initiated by a collateral borrower that requires a specific issue tend to trade below the GC repo rate. However, some form of filtering needs to be applied to the SOFR rate to remove transactions that are “special”. Simply removing transactions based on recent issues keeps other issues that may be trading special in the calculation. It would also exclude those on-the-run issues that may not be trading special. It is difficult to know the exact level of filtering required.

How does SOFR compare with other rates?
There are a few key features that distinguish SOFR from other rates:
Overnight: SOFR and EFFR are overnight rates, while Libor has term rates.

Secured: SOFR is a secured rate and therefore incorporates the cost of balance sheet while EFFR and Libor are unsecured.

Risk free: SOFR and EFFR are measures of the risk free rate, while Libor has some credit component since it measures bank funding costs.

Arrears: SOFR and EFFR are rates where payment occurs in arrears versus Libor, where you can settle in advance.

The similarity between SOFR and EFFR makes it useful to compare the new rate to EFFR. The Fed has released SOFR data going back to August 2014 and since then, the 3-month geometric means of SOFR and EFFR have generally tracked closely. Over this period SOFR has averaged about 4bp below EFFR, which is sensible since SOFR is a secured rate and may incorporate some special transactions. The rate is more volatile during month- and quarter-ends, where balance sheet pressures tend to move SOFR above EFFR.

A brave new world with SOFR

Below we discuss the ARRC transition plan. However, we believe that ultimately it is the liquidity in SOFR-linked contracts that will drive the pace of transition. Since SOFR is an overnight rate, many market participants may need to build out the infrastructure of compounding a daily rate. SOFR-based swaps are also likely to be uncleared initially, while Libor-linked swaps are cleared. Regulators may need to incentivize investors to switch to SOFR for new swaps entered into before 2021.

Another key issue as the market transitions to SOFR is the inclusion of the new rate in the FASB hedge accounting standards. Current standards include the SIFMA Municipal Swap Rate, the US Treasury Rate, the Libor Swap Rate, and the Fed Funds Effective Swap Rate. Inclusion of the SOFR will help build liquidity in contracts referencing SOFR and ease the transition for many derivative counterparties.
The paced transition plan:

  •      H2 2018: Infrastructure for futures and/or OIS trading in the new rate is put in place.
  • By end 2018: Trading begins in futures and/or bilateral uncleared OIS that reference SOFR.
  • Q1 2019: Trading begins in cleared OIS that reference SOFR in the current (EFFR) PAI and discounting environment.
  • Q1 2020: CCPs begin allowing market participants a choice between clearing new or modified swap contracts (swaps paying floating legs benchmarked to EFFR, Libor, and SOFR) into the current PAI/discounting environment or one that uses SOFR for PAI and discounting.
  • Q2 2021: CCPs no longer accept new swap contracts for clearing with EFFR as PAI and discounting except for the purpose of closing out or reducing outstanding risk in legacy contracts that use EFFR as PAI and the discount rate. Existing contracts using EFFR as PAI and the discount rate continue to exist in the same pool, but would roll off over time as they mature or are closed out.
  • By end 2021: Creation of a term reference rate based on SOFR-derivatives markets once liquidity has developed sufficiently to produce a robust rate.

The legacy problem
The FSB’s Market Participants Group (MPG) estimates the notional volume of outstanding financial products referencing USD Libor at more than $160tn. USD-denominated interest rate swaps represent approximately 90% of this outstanding gross notional volume. In terms of other USD-denominated products, the MPG estimates that USD Libor is used as the reference rate in 97% of syndicated loans, 84% of floating/variable rate notes and 71% of collateralized loan obligations. A transition for all of these contracts and products will be a complicated task to say the least. The key question for the transition is whether the industry needs to:

  •  Amend contracts to reference an alternative rate, or
  •  Amend the definition of Libor through the fallback protocol to replace the current methodology with alternative reference rates. This could be done by developing a spread, which could be added to the base of the risk free rates.

By March 2018 the International Swaps and Derivatives Association (ISDA) plans to draft a report that includes a survey for the users of Libor (derivatives, securities, loans, MBS), identifying issues with the transition in existing and new contracts, and recommendations.

ISDA Triggers: What determines that Libor doesn’t exist?
The first question is what determines that an investor has to find a replacement for Libor in an existing contract. If all panel banks stop submitting Libor, it would be an obvious trigger. But it becomes more difficult if a few banks drop from the panel. What determines that the panel may have “degraded” is a very subjective issue. Currently, the ISDA trigger is a public statement by the supervisor (in this case the FCA) about an insolvency of the relevant administrator (in this case ICE) or that Libor has been permanently or indefinitely discontinued or that it may no longer be used. Another ISDA trigger is a public statement by the administrator that it will cease publishing Libor.

ISDA fallback: What should replace Libor in a contract?
Current ISDA fallback protocol is meant for a temporary disruption for Libor. Many contracts allow the counterparty to call up 3 banks in London and obtain an average quote. However, in a situation when banks have stopped submitted Libor, this does not seem like a feasible alternative. Thus more work needs to be done on a permanent solution for a time when Libor may not exist. ISDA has already confirmed it is willing to develop a protocol that would allow market participants to update existing documents to insert a fallback rate should Libor cease to be published after 2021, or possibly sooner in the case of Euribor.
Under the ARRC transition plan, counterparties to Libor-linked swaps would amend their documentation to reference an alternative rate well before Libor might cease. Moving from Libor to SOFR would create a valuation change given that SOFR is lower than the Libor rate. The aim is to find the amount of compensation that each side will be willing to pay and receive to make the switch. That amount could be thought of as a spread which could be added to SOFR, which would replace Libor in an existing spread.

How do you compute and administer the spread?
There are two approaches are currently being discussed to compute the spread: a historical approach and an auction approach. A historical approach would freeze the Libor-SOFR basis on the day the benchmark is ceased while the latter would involve determining the Libor-SOFR basis each day via an auction process.

The cash problem
So far we have discussed the issues for the transition away from Libor for derivatives. However, there are many cash products that are linked to Libor, with a many of these products possessing terms past 2021. The ARRC has expanded its work to incorporate the cash transition plan, resulting in discussions about creating a term reference rate. That term reference rate would have to be built by first developing futures and OIS markets that reference SOFR. It will likely not be as robust as SOFR itself, and so derivatives transactions will almost certainly need to be based on the overnight rate. However, a term reference rate could conceivably be used in some loan or other contracts that currently reference Libor.
Below we discuss some of the current fallback issues across different products. We would expect new products that mature beyond 2021 to have a more robust fallback as a world without Libor looks much more likely now.

Current fallback language in Libor-linked cash products
 Mortgages and other consumer products: Typically the contract language in mortgages gives the noteholder the ultimate authority to name a successor rate if Libor was permanently discontinued. Other consumer loans may be more varied, but generally seem to have similar flexibility.

  • Floating rate notes: There are an estimated $1.5tn in outstanding Floating Rate Notes referencing USD Libor. However, 84% of these FRNs will mature by the end of 2021, and 92% by the end of 2023. Typical contract language would direct the calculation agent to first poll a sample of banks (similar to the ISDA fallback language) and then convert to fixed-rate at the last published value of Libor if quotes are not received. It would typically require unanimous consent of the noteholders to adjust these terms.
  • Securitizations: Approximately $1.8tn in outstanding securitizations reference USD Libor. Agency MBS allow Fannie Mae and Freddie Mac to name a successor rate if Libor was permanently discontinued, but typical contract language in other securitizations would require a poll of banks and then convert to fixed-rate at the last published value of Libor if quotes are not received. CLOs are typically called after an initial 1-2yr period, at which point fallback language could be amended.
  • Corporate Loans: Flow of Funds data estimate the level of nonfinancial corporate loans at $2.7tn (does not include committed but undrawn lines). A large share — $2.1tn — are syndicated loans (according to SNC data). Roughly 85% percent are floating rate, and a large share of those appear to reference Libor. The typical contract language appears to name the Prime Rate or the Effective Fed Funds Rate plus a spread as the fallback if Libor was discontinued. Note that bilateral loans can be renegotiated by the borrower and lender to amend this, while syndicated loans currently tend to require unanimous lender consent to amend these terms. However, syndicated loans are amended fairly frequently, so it is very likely that most or all of the outstanding stock of loans would be amended before the end of 2021. We expect that lenders will make sure that new and existing loan documents make sense in a world without Libor. Where possible, lenders and borrowers may look to adjust their credit agreement voting provisions so that any change to the rate benchmark will not require a 100% vote. In syndicated loan documentation, borrowers may want the selection of a replacement rate to require the approval of a majority of lenders, rather than requiring unanimous approval.
    Priya Misra, Gennadiy Goldberg

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The BABCPHL recognizes our Club Level Members:

  • Almac
  • American Airlines
  • Cigna
  • Cigna
  • Duane Morris
  • EisnerAmper LLP
  • Faegre Drinker Biddle & Reath LLP
  • Fisher Phillips
  • HSBC
  • International Products Corporation
  • Johnson, Kendall & Johnson, Inc.
  • KPMG
  • Morgan Lewis
  • Penn Medicine
  • Welsh Government