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As FHLB members look toward the future and the need to transition away from exposure to the London Interbank Offered Rate (LIBOR), the FHLB recognizes its need as the leading issuer of Secure Overnight Financing Rate (SOFR) linked securities to help educate and support members in the transition process. 

On this page you will find resources regarding the latest market developments from various sources to assist your institution in the LIBOR transition process.


LIBOR Transition Moves Forward - October 2021

October 2021

The LIBOR Transition timeline is moving forward, as we near the end of 2021.  The Financial Conduct Authority has announced the discontinuation of the 1-week and 2-month US dollar LIBOR settings immediately after December 31, 2021 and the remaining US dollar settings will be discontinued immediately after June 30, 2023.  U.S. regulators are pushing U.S. financial institutions to move into alternative reference rates and discontinue the use of LIBOR in 2022.  This could affect the liquidity of the LIBOR market in 2022.

An industry initiative named “SOFR First” went into effect in July.  This initiative directed Broker/Dealers to quote linear-derivatives in SOFR terms rather than LIBOR.  This initiative has been credited with increasing the liquidity in SOFR swaps.  The increase in SOFR swap transactions led the Chicago Mercantile Exchange (CME) to publish the first Term SOFR rates.  The Alternative Reference Rate Committee of the Federal Reserve (ARRC) has issued stern warnings that Term SOFR is not to be used unless absolutely necessary and not to be widely used for derivatives.  The ARRC wants to limit the use of Term SOFR, as they believe that daily average SOFR calculated in arrears or in advance will suffice in most business loans or securitizations.  As Term SOFR is based on rates from daily average SOFR swaps, the ARRC and CME do not want to see volumes develop in Term SOFR derivatives that may decrease the volumes in the underlying daily SOFR market on which it is based.

The Clearing Houses will be moving legacy LIBOR swaps to SOFR as the June 30, 2023 date gets closer.  This could lead to operational risk for entities who have not voluntarily moved their legacy LIBOR swaps to an alternative reference rate prior to that date.  Any LIBOR positions not migrated away from LIBOR will be converted to SOFR by them on a date to be specified by the Clearing Houses.  Members should be aware of this and create their operational plan for the migration of their positions voluntarily or involuntarily.  Clearing Houses will be charging customers for moving these swaps and there has been discussion of a possible legacy LIBOR charge in 2022, if LIBOR rates become difficult to obtain due to liquidity issues.

IHS Markit announced another new alternative reference rate was announced, in addition to Ameribor and the Bloomberg Short-term Bank Yield Index (BSBY).  It is called CRITR, which stands for USD Credit Inclusive Term Rate.  This index purports to be a broad-based measure of funding levels for banking institutions funding in U.S. Dollar, in institutional markets on a senior unsecured basis.  Institutions looking to use these alternative reference rates should be aware that the International Organization of Securities Commissions (IOSCO) issued a statement on Credit Sensitive Rates on September 8, 2021.      IOSCO expressed concerns regarding underlying principles for IOSCO compliance for credit sensitive reference rates and that some of LIBOR’s shortcomings may be replicated due to the lack of sufficient underlying transaction volumes for these rates during times of stress.  The ARRC and several U.S. agencies and regulators, including the Federal Housing Finance Agency, have raised concern regarding these credit sensitive rates.

U.S. federal legislation to resolve tough legacy contracts that do not contain fallback language is progressing, following approval from the House Financial Services Committee on July 29.   This is similar to legislation that was passed in New York State in April.

FHLB Cincinnati is moving forward with its LIBOR transition plan.  The FHLB has begun the process of migrating LIBOR positions away from LIBOR.  Management and the Board of Directors continue to monitor LIBOR exposure and the he liquidity of the SOFR market.  The FHLB System is preparing to be able to issue compounded SOFR debt products.  Like all MBS investors, the FHLB awaits actions by Freddie Mac and Fannie Mae as to how and when they will migrate LIBOR linked floating rate MBS and CMBS to SOFR. 

The ARRC made the statement that the market now has all the tools necessary for LIBOR transition.  Please do not hesitate to reach out to the FHLB for information and assistance in your planning for this event.

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