CRO RC: LIBOR Resources

Chief Risk Officer Committee

LIBOR Resources

LIBOR, or the London Interbank Offered Rate, which was created almost 50 years ago, has long been the recognized benchmark interest rate used by major global banks lending to one another in the international interbank market for short-term loans. The combination of five currencies and seven maturities leads to a total of 35 different LIBOR rates calculated and reported each business day. The most commonly quoted rate is the three-month US dollar rate, usually referred to as the current LIBOR rate.

While LIBOR has long been the global benchmark standard for interest rate, it is expected to be phased out after 2021.  This is due both to the fact that the determination of LIBOR is based on fewer and fewer interbank transactions, which makes it an increasingly unreliable benchmark for the global financial markets, and the fact that LIBOR has been subject to manipulation.  The pending cessation of LIBOR has resulted in financial markets and regulators worldwide working to develop alternative benchmarks to replace LIBOR. Over the past few years, the US Federal Reserve, the UK's Financial Conduct Authority (FCA) and other regulators have convened industry-led working groups to develop risk-free rates (RFRs) as an alternative to LIBOR.  The goal of these efforts is to have a replacement for LIBOR by the end of 2021.

In the US, the Alternative Reference Rates Committee (ARRC)—a private industry group convened by the Federal Reserve Board and the New York Federal Reserve Bank to plan the market's transition away from US dollar LIBOR—has selected SOFR (the Secured Overnight Financing Rate) as the new interest rate benchmark for US dollar-denominated transactions in bond and loan markets. In the UK, SONIA (the Sterling Overnight Index Average) has been chosen as the new interest rate benchmark for pound sterling transactions. Other financial markets, including those for transactions denominated in euro, Swiss franc, and Japanese yen, have developed their own risk-free rates (EONIA, SARON, and TONAR, respectively).

In light of the fast-approaching cessation of LIBOR, regulators – both inside and outside the US – are encouraging firms to conduct an analysis of all their current contracts and investment policies to: (1) determine where LIBOR is referenced; and (2) ensure they have alternative benchmark rates in place by the time LIBOR is discontinued.  To assist firms in the transition, the AARC, regulators, and industry service providers – such as law firms and consultants – are beginning to publish information regarding the impact of LIBOR.  This information includes the following resources:

AARC Resources

The Alternative Reference Rates Committee website:  This website, created by the NY Federal Reserve Bank, provides a variety of information and resources to help market participants deal with the transition away from LIBOR.  It also provides information about SOFR as a new reference benchmark rate.  See: https://www.newyorkfed.org/arrc. 

A User’s Guide to SOFR, ARRC (April 2019).  This 21-page white paper discusses how market participants can use SOFR in cash products and issues such participants should consider in connection with the SOFR rate. It is available at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf

Options for Using SOFR in Adjustable Rate Mortgages, ARRC (July 2019).  This 13-page paper is intended to help illustrate a model of how market participants could use the Secured Overnight Financing Rate (SOFR) in consumer closed-end, residential adjustable rate mortgage (ARM) products.  It is available at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-SOFR-indexed-ARM-Whitepaper.pdf

US Regulatory Resources

Staff Statement on LIBOR Transition, SEC Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and the Office of the Chief Accountant (July 12, 2019).  This Statement discusses steps SEC registrants may want to consider to manage the transition away from LIBOR.  It is available at: https://www.sec.gov/news/public-statement/libor-transition

See, also, ICI July 15, 2019 Memo summarizing the SEC’s Staff Statement: https://www.ici.org/my_ici/memorandum/memo31855  

UK Regulatory Resources

Dear CEO LIBOR Letter, Financial Conduct Association (UK), (September 18, 2019).  This letter, from the FCA to UK registrants, discusses the issues they need to be considering in connection with the cessation of LIBOR.  It is available at: https://www.fca.org.uk/news/statements/dear-ceo-libor-letter

See, also, ICI March 14, 2019 Memo summarizing the FCA’s Letter: https://www.ici.org/my_ici/memorandum/memo31652

Consultants’ Resources

Oliver Wyman, a global consulting firm, continues to publish updated information regarding the impact of LIBOR. Adam Schneider of Oliver Wyman presented to a joint meeting of ICI’s Internal Audit and Chief Risk Officer Committees on Nov. 21, 2019. Links to his presentation and other Oliver Wyman publications on LIBOR are available through these links:

The documentation provided by ICI that may be accessed by committee and task force members is restricted to members use only and not for distribution or reproduction. Documentation may be used internally at member organizations as needed to facilitate committee and task force initiatives.