- Global Derivatives Get Leeway to Use Different Libor Successors
- New York State LIBOR Legislation has been signed by Governor Cuomo
- Options for Using SOFR in New ABS, MBS, and CMBS Products (March 2021)
- The Need for Federal Legislation in the Transition Away from LIBOR - The Need for Federal Legislation in the Transition Away from LIBOR - SIFMA (April 13, 2021)
- Intercontinental Exchange - ICE Benchmark Administration Publishes Feedback Statement for the Consultation on Its Intention to Cease the Publication of LIBOR® Settings (theice.com) (March 5, 2021)
- Announcements on the end of LIBOR | FCA (March 5, 2021)
- ARRC_Benchmark_Transition_Event_FAQs.pdf (newyorkfed.org) (March 5, 2021)
- The Fed - SR 21-7: Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR (federalreserve.gov) March 9, 2021
- ISDA Statement on UK FCA LIBOR Announcement – International Swaps and Derivatives Association (March 5, 2021)
- IBOR-Fallbacks-LIBOR-Cessation_Announcement_20210305.pdf (bbhub.io) (March 5, 2021)
What is LIBOR?
London Interbank Offer Rate (LIBOR) is a widely accepted benchmark interest rate representing the short-term, unsecured, wholesale borrowing rate at which banks borrow funds from other banks in the London market. A group of panel banks submits rates on a daily basis, which are averaged and published in a variety of currencies.
LIBOR has grown to become a global benchmark interest rate for over $350 trillion in financial products, including bonds, derivatives, mortgages, and other loans.
LIBOR is being phased out
For over 40 years, LIBOR has played a significant role in the worldwide financial services industry. However, the Financial Conduct Authority (FCA), which oversees the rate, has indicated it will no longer compel banks to continue to submit rates beyond 2021. As a result the number of submissions could fall significantly, reducing the representativeness of LIBOR or cause LIBOR publication to cease entirely. The FCA’s statement triggered what is now known as LIBOR transition. Therefore, it’s critical for LIBOR to be replaced by the end of 2021 with a stronger, more reliable benchmark.
What will replace LIBOR?
The Alternative Reference Rate Committee (ARRC), a financial industry group, has recommended using the Secured Overnight Financing Rate (SOFR) to replace USD LIBOR. The ARRC was convened by the Federal Reserve Board and the New York Fed specifically to help facilitate the U.S. transition away from LIBOR. Members include a mix of banks, accounting firms, legal firms and other industry representatives.
Information about the SOFR from the ARRC can be found at any of the following links:
What is the timeline for the LIBOR transition?
The timeline and progress of the transition can be found here: www.newyorkfed.org/arrc/sofr-transition
How will the Libor Transition Impact FHN Financial Customers?
The LIBOR transition will impact certain FHN Financial products and services that customers currently hold or use and those that may be offered in the future. While the extent of the impact will depend on a range of factors which include evolving market and industry developments, potential impacts include changes to valuations, documentation and product performance.
Please note that the impact of LIBOR cessation on existing LIBOR-linked transactions depends on the terms and conditions of the transaction and particularly on the “rate fall back language” which (if applicable) determines the interest rate benchmark that would prevail should LIBOR cease to exist or become unavailable.
How can I prepare for the LIBOR transition?
See the following PDF for a checklist: www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Buy_Side_Checklist.pdf
What is the difference between LIBOR and SOFR?
LIBOR is an unsecured rate based on submissions from a panel of between 11 and 16 banks. The submissions are intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets. Currently, 35 individual LIBOR rates are produced in 7 tenors across five currencies. Daily transactional volume estimates for a 3-month LIBOR are around $500 million (www.newyorkfed.org/arrc/sofr-transition#aboutsofr).
SOFR is a secured rate derived from the cost of borrowing cash overnight collateralized by U.S. Treasury securities. The rate is composed of tri-party repo, General Collateral Finance repo, and bilateral Treasury repo transactions through the Fixed Income Clearing Corporation (FICC). Transactional volumes regularly exceed $800 billion daily (www.newyorkfed.org/arrc/sofr-transition#aboutsofr). No forward-looking SOFR term structure currently exists since SOFR is a daily rate, but is part of the ARRC’s transition plan.
In addition, SIFMA has published "SOFR Primer: The transition away from LIBOR" on the topic. (www.sifma.org/resources/research/sofr-primer/)
|Risk free rate (no credit risk)||Bank lending rate (includes credit risk)|
|Overnight (backward looking)||Forward looking|
|Secured (collateralized)||Unsecured (uncollateralized)|
|Calculated & published daily by the NY Fed||Calculated & published daily by ICE Benchmark Administration|
|Transaction based||Based on LIBOR bank submissions & expert judgement|
|Based on ~$1T transactions per day (repo markets)||Based on ~$1B transactions per day (3-month LIBOR)|
|No term structure||Term structure|
Additional LIBOR Resources
- GSE’s Joint LIBOR "Playbook"
- GSE’s Joint LIBOR FAQs
- Multiclass Participant Memorandum (MPM)
- ICE LIBOR® Consultation on Potential Cessation
ARRC Best Practices
ARRC Recent Publications (not a comprehensive list)
- ARRC Publishes Approach to Using SOFR in New Issuances of a Variety of Securitized Products (newyorkfed.com) March 29 2021
- ARRC Supplemental Recommendation of Hardwired Fallback Language for Business Loans (newyorkfed.org) March 25 2021
- ARRC Welcomes Passage of LIBOR Legislation by the New York State Legislature (newyorkfed.com) March 24 2021
- ARRC Publishes White Paper on Suggested Fallback Formula for USD LIBOR ICE Swap Rate March 24, 2021
- ARRC Provides Update on Forward-Looking SOFR Term Rate March 23 2021
- ARRC 2020 Objectives (April 17,2020)
- ARRC Summary of Back Received in the ARRC Spread-adjustment Consultation and Follow Up (May 6, 2020)
- ARRC Vendor Best Practices (May 7, 2020) Calls on vendors to complete enhancements to their product offerings to support SOFR
- ARRC Best Practices (May 27, 2020)
- ARRC CFTC Swaptions Relief Request letter (June 17, 2020)
- Guides on the Endgame for USDA LIBOR (November 30, 2020)
- ARRC Applauds Major Milestone in Transition from U.S. Dollar LIBOR (November 30, 2020)
- ARRC Releases Guides and Highlights New ISDA Webinar on USD LIBOR Endgame (December 7, 2020)
Ginnie Mae HECM Transition Documents
- Mortgagee Letter 2021-08 (hud.gov)
- FHA Model Documents SF (hud.gov)
- All Participant Memorandum (APM) (ginniemae.gov)
Alternative Benchmark Rates
- LSTA includes AMERIBOR as a credit-sensitive replacement to LIBOR
- Libor-Replacement Competitor Gains Strength From New Offerings
Who is driving the industry transition?
The LIBOR transition is a major structural change to the global financial markets. Accomplishing the task requires input and coordination of many different market and industry participants including: regulators, industry groups, trade organizations, and financial institutions.
We’ll be ready and keep you updated
The expected transition to a new benchmark following the widespread use of LIBOR in the financial markets will be a significant event. FHN Financial has a working group that is monitoring the LIBOR developments closely. Check this page for the most up to date FHN Financial information.