LIBOR Cessation: Key Insights and Transition Plans
In-depth analysis of the upcoming cessation of LIBOR, including reasons for its discontinuation, impact on financial markets, and the emergence of alternative reference rates like SOFR. Explore the role of the Alternative Reference Rates Committee and the implications for various stakeholders in the financial industry.
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Its so hard to say goodbye: a status report on LIBOR cessation Lemuel D. Whitsett 301 Fayetteville Street, Suite 1700, Raleigh, NC 27601 919.981.4314 lwhitsett@williamsmullen.com
How will LIBOR die? 3 33
LIBOR cessation generally >LIBOR will no longer be available after 12/31/2021 >More precisely, the Financial Conduct Authority (FCA) in UK won t compel self-reporting on overnight borrowing rate after 12/31/2021 >Why is LIBOR going away? Manipulation, scandal, reduced confidence Underlying market not sufficiently active Unregulated nature of rate >Fear of Zombie LIBOR after 12/31/2021 or possibly before 4 44
Whos in charge here? Alternative Reference Rates Committee of the NY Fed > Members > Ex Officio Members Consumer Financial Protection Bureau Federal Deposit Insurance Corporation Federal Housing Finance Agency Federal Reserve Bank of New York Board of Governors of the Federal Reserve System Office of Financial Research Office of the Comptroller of the Currency U.S. Commodity Futures Trading Commission U.S. Securities and Exchange Commission U.S. Treasury Department AXA Bank of America BlackRock Citigroup CME Group Deutsche Bank Fannie Mae Federal Home Loan Bank of New York Freddie Mac GE Capital Goldman Sachs Government Finance Officers Association HSBC The Independent Community Bankers of America Intercontinental Exchange ISDA J.P. Morgan Chase & Co. LCH LSTA MetLife Morgan Stanley National Association of Corporate Treasurers Pacific Investment Management Company SIFMA TD Bank Wells Fargo World Bank Group ARRC convened in 2014, completed first objectives in 2017, then reconvened in 2018 with expanded membership Currently implementing a Paced Transition Plan 5 55
SOFR, nice to Meet You >Early indications suggest that the Secured Overnight Funding Rate ( SOFR ) or some variation will be the replacement rate Some market participants are advocating for a cost of funds rate or an ICE Bank Yield Index (BYI), so a systemwide transition to SOFR is not a foregone conclusion yet >Key elements of SOFR Broad measure of cost of secured overnight borrowing against treasuries, seen as more stable and lower risk Administered by NY Fed and launched in April 2018 Widely traded Daily rate, but efforts are underway to design term options 6 66
A tale of two rates >LIBOR >SOFR Multiple maturities, daily or term (1/3/6/12- month) Lightly traded (e.g., 3-month LIBOR trading only ~$500M daily but supporting $200T in contracts) Published by ICE Benchmark Administration Unsecured rate Cost of funds rate, as self-reported to the Financial Conduct Authority (FCA) in UK Currently a daily rate only (NY Fed is working on implementing SOFR term rates) Highly traded (~$1T daily) Published by NY Fed Secured rate Cost of borrowing against treasuries IOSCO compliant Derivatives contracts have recently been executed using SOFR as the base rate 7 77
What is everyone doing about this? >Current activity and awareness in our own North Carolina marketplace Mega-banks Super regionals Community banks >ARRC guidance and consultations (see esp. Bilateral Business Loans ) For now, the guidance only provides detailed loan document verbiage pertaining to (a) triggering events for LIBOR unavailability, (b) floating rate alternative options, (c) lender discretion on replacement rate selection, (d) borrower consent rights, and (e) resetting spreads For now, these recommendations are more useful for large banks 8 88
What does LaserPro say? >LaserPro LaserPro deals with the unavailability of a LIBOR Index with two rather glib sentences To our knowledge, D+H has not taken a position on LIBOR phase- out and doesn t seem poised to offer guidance on the subject 10 10 10
Good gravy, so now what? 11 11 11
What can we do in 2019? > Watch the movie play (have someone follow the ARRC website) > Be prepared for possible negotiation by savvy borrowers or their attorneys > Have a policy and stick to it as a team > Pester D+H > If you have any swapsbased on LIBOR Anticipate a potential mismatch between note rate and swapped rate Remain in close communication with your swap provider > If you have participated loans based on LIBOR Consent from participants for rate adjustments? > If you are involved in any bond transactions based on LIBOR Counsel with counsel to determine if a rate amendment will be construed as a reissuance of the bond 12 12 12
Resources >ARRC https://www.newyorkfed.org/arrc >Additional editorial commentary: ISDA https://www.isda.org/ LSTA https://www.lsta.org/ 13 13 13
