Frequently Asked Questions (FAQ)
from Members regarding LIBOR transition
Do Secured Overnight Financing Rate (SOFR) swaps clear?
Yes, they clear at both The Chicago Mercantile Exchange (CME) and the London Clearing House (LCH). To see the volume of SOFR swaps if you have access to a Bloomberg terminal, type SDR [go], choose “rates”, and choose “SOFR”. (You can see the Overnight Index Swaps (OIS) in the same way on the same screen).
I have a cleared LIBOR swap hedging a fixed rate Advance, how do I limit my exposure to LIBOR?
There are a couple of ways to limit your LIBOR exposure:
1) enter into a LIBOR swap with the same terms as your existing swap except in the opposite direction and clear this swap at the same clearinghouse, have the swaps compressed by the clearinghouse and enter into a new SOFR or OIS swap.
2) enter into a LIBOR swap with the same terms as your existing swap except in the opposite direct and clear this swap at the same clearinghouse and have the swaps compressed, prepay or allow your fixed rate Advance to mature and enter into a SOFR Advance with no swap.
I have looked at documentation in my business loans and it says that I can change the index. Is this all I have to do to be ready for LIBOR transition?
No. The language in your business contracts may be ambiguous and open to interpretation based on how LIBOR may be brought to cessation. It is unknown how LIBOR will cease to exist. Some of the alternatives are:
- The Financial Conduct Authority of the UK may deem that LIBOR is not representative of the market and LIBOR is no longer published
- The Financial Conduct Authority of the UK may deem that LIBOR is not representative of the market with a future date for cessation of LIBOR
- The Financial Conduct Authority of the UK may deem that LIBOR is not representative of the market but ICE (the LIBOR Administrator) may continue to publish LIBOR because Dealers continue to contribute their estimates of LIBOR and LIBOR continues to be published
- ICE may stop publishing LIBOR without a statement from the Financial Conduct Authority
- ICE may come up with an alternative estimation model/framework and continue to publish an index calling it LIBOR
- LIBOR ceases to be updated and the LIBOR rate remains at the same level and is published daily – essentially a fixed rate
Also, it is not just the index that needs to be changed but the spread to the index or the margin on the index. SOFR unlike LIBOR does not have a term component (there is no term SOFR at this time, although it is envisioned). There is also no credit component as SOFR is based on Secured Treasury Repurchase transactions. LIBOR include both of these components. ISDA has announced that they have decided on contracting with Bloomberg to provide data on the spread adjustment when moving from LIBOR to SOFR. This is a process that is evolving and we are still unsure as to the exact methodology for this calculation. We would suggesting watching developments in this area at ISDA to how to determine the adjustment to equate your contracts when moving from LIBOR to SOFR and where to obtain an industry standard data point for the adjustment.
We believe you should contact your legal counsel for specific guidance regarding the language in your business loans and be watching for developments from the Alternative Reference Rate Committee (ARRC) regarding LIBOR fallbacks and triggers in business loans and ISDA as they move forward with providing LIBOR SOFR spread adjustment data.
Have specific questions about the LIBOR transition, SOFR or other specific market questions? Our LIBOR Transition team will strive to answer them at firstname.lastname@example.org.Contact us.
The information in this document is for general guidance only. Accordingly, the information is provided with the understanding that the Federal Home Loan Bank of Cincinnati or its employees are engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers.