LIBOR Transition

Current SOFR: {{ firstRate.Value }}%, updated {{ firstRate.Date }}.

SOFR, last 12 months
Source: Bloomberg News

 

As FHLB members look towards 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. 

What is LIBOR?

LIBOR is a series of benchmark interest rates that are used for pricing loans, debt and derivatives.  Due to LIBOR being based to a large part on expert judgement rather than actual transaction volumes its regulator the Financial Conduct Authority (FCA) based in the United Kingdom has stated that they will no longer require firms to provide LIBOR indications after 12/31/2021. 

Benchmark regulation was passed by the European Union (conforming to recommendations from BCBS/IOSCO) regarding the requirement that the benchmark index be representative of the market.  Should the FCA issue a statement that LIBOR is no longer representative of the market, many foreign counterparties and contributors to LIBOR setting would no longer be able to utilize LIBOR and it is assumed that LIBOR would cease to exist in its current form.

Per the NY Fed, at the end of 2016 USD LIBOR transactions were $200 trillion, roughly 10 times U.S. GDP.  ISDA estimates that there are about $370 trillion in financial contracts tied to LIBOR around the world.

Why begin the transition?

The LIBOR cessation will impact a vast array of areas within your institution.  Analysis of the impact should be started early to allow for changes that may be necessary to products, systems, processes, transactions or contracts that the institution has already entered into.  As an example, LIBOR may be imbedded in a business loan in a penalty calculation while it is not the primary rate on the loan. Also, regulators are now moving towards including LIBOR transition in their examination work plans, as stated by the Federal Reserve.


When will LIBOR go away?

Panel banks which contribute to the LIBOR setting process will no longer be required to provide LIBOR indications after 12/31/21.  The FCA could declare LIBOR to be non-representative of the market at any time which could cause the index to cease.  The administrator of LIBOR (ICE) has indicated that they may be able to develop a LIBOR type substitute to be able to keep LIBOR quotations for a period of time or that dealers may still wish to contribute indications after 2021 to keep LIBOR in place.  It is unknown at this point if LIBOR will exist after 2021.


Who should be transitioning away from LIBOR?

Both you and your counterparties will need to move away from LIBOR.  The key is to understand your exposure and working with your counterparty to replace LIBOR with a mutually agreeable alternative.  The goal is to minimize the value transfer.


How do I transition away from LIBOR?

Inventory your LIBOR exposure.  Monitor and understand the alternative reference rates choices such as SOFR.  Create a plan to stop utilizing LIBOR and to transfer your legacy LIBOR exposure to a replacement index.  This may require renegotiation of existing contracts and changes to systems.  Incorporate recommended fallback and trigger language in your contracts.  Both ISDA and the ARRC have recommended language available for different instrument types.

Contact Us

Have specific questions about the LIBOR transition, SOFR or other specific market questions? Our LIBOR Transition team will strive to answer them at libortransition@fhlbcin.com.

Contact us.