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What You Need to Know
Replacing the world’s most widely used interest rate benchmark.
On March 5, 2021, the UK Financial Conduct Authority, who oversees LIBOR, announced the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by Intercontinental Exchange Benchmark Administration, an authorized administrator, regulated and supervised by the UK Financial Conduct Authority. The UK Financial Conduct Authority and Intercontinental Exchange confirmed that the publication of all US dollar LIBOR settings will cease by June 2023.
The specific timelines are below.
- The publication of 1-week and 2-month US dollar LIBOR settings will cease after December 31, 2021
- The publication of overnight, 1-month, 3-month, 6-month and 12-month US dollar LIBOR settings will cease after June 30, 2023
The Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency (“US regulators”) released concurrent announcements that suggest market participants cease entering into new US dollar LIBOR based transactions by December 31, 2021. New contracts should use a reference rate other than LIBOR or have fallback language that defines an alternative reference rate after LIBOR’s cessation.
How To Calculate Your Rate?
One Month Adjusted Term SOFR is calculated by adding One Month Term SOFR plus the One Month ARRC fixed adjustment of 0.11448%.
One Month Term SOFR is published on the CME Group site.
Click here for current rates.
The ARRC spread adjustments are published by the NY Fed.
Click here to learn more.
WHAT IS LIBOR?
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate that indicates the average borrowing costs between major global banks. The unsecured rate is based on five currencies (including the US dollar) with multiple tenors from 1 day to 1 year. The rate is calculated and published each day by the Intercontinental Exchange (ICE). LIBOR and other IBORs are currently used as a reference rate for financial instruments / products / contracts.
WHY IS LIBOR BEING DISCONTINUED?
Declining liquidity within the interbank unsecured funding markets has increased the need for expert judgement by LIBOR panel banks. Some believe this left the rate open to manipulation in the last financial crisis. Many safeguards have been implemented to prevent manipulation since then. Even with those efforts in place, regulators have instructed the financial industry to move from LIBOR to alternative reference rates at the end of 2021.
WHAT HAPPENS TO MY LOAN WHEN LIBOR IS PHASED OUT?
Across the bank, we have already begun incorporating the appropriate fallback language in our documentation in anticipation of the LIBOR cessation. We are also working to amend legacy contracts to include the appropriate fallback language.
Please note, depending on when your loan was opened or amended, it may already contain the necessary fallback language to permit a seamless transition to a new alternative reference rate (ARR). If your loan does not include fallback language, you will receive loan modification agreement(s) to update to a new alternative reference rate (ARR).
DO I NEED TO DO ANYTHING TO PREPARE FOR THE LIBOR TRANSITION?
No, there is nothing you need to do at this time. We will provide updates in advance of any necessary changes to your loan. Should you have any questions, please contact your relationship manager.
FREQUENTLY ASKED QUESTIONS
We have designated a team comprised of senior management and subject matter experts across multiple disciplines within the bank to facilitate the transition and adoption of an alternative reference rate (ARR).
We are preparing our systems to support products and financial instruments referencing alternative reference rates, such as SOFR, as we will not issue new products / instruments referencing US dollar LIBOR after December 31, 2021.
We are coordinating with clients and counterparties to incorporate the appropriate fallback language in all new and legacy US dollar LIBOR agreements and amendments.
The Alternative Reference Rate Committee (ARRC) has proposed the Secured Overnight Financing Rate (SOFR) as the preferred replacement to US dollar LIBOR.
SOFR is a secured, overnight rate that correlates closely with other money market rates. It is fully transaction based and covers repo
markets secured by US Treasuries.
SOFR was introduced by the New York Fed in cooperation with the US Treasury Department in April 2018.
There are a range of alternative reference rates available across the market, however, it is expected that an overwhelming majority of market participants will proceed with a conversion to SOFR.
US dollar LIBOR is a rate at which representative banks are able to borrow on an unsecured basis in the Interbank market. It has multiple forward-looking tenors, including overnight, 1-week, 1-month, 2-months, 3-months, 6-months, and 12-months.
SOFR is an overnight, near-risk free rate and is based on transactions in the repo markets which are secured by US Treasuries.
Term SOFR was officially recommended by the Alternative Rate Reference Committee (ARRC) on July
It is a forward‐looking term rate for the applicable corresponding tenor based on SOFR that has been
selected, in this case, for 1-month. More simply this can also be thought of as Market expectations for
forward‐looking SOFR, compounded over relevant reference period. The 1-month term SOFR ticker is
- Resilient – set of term SOFR rates can be produced in all market conditions, including periods of market fragmentation, illiquidity, or negative interest rates.
- Robust – it is resistant to manipulation and anchored in real transactions and executable quotes “expert judgement” is not used as in the case of LIBOR.
- Coherent – integrity and shape of yield curve is maintained throughout the calculation process while utilizing all possible transaction data
Contracts that fall back from 1-month LIBOR to 1-month SOFR use the ARRC spread adjustment of 11.448 bps. The spread adjustment is based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. The fallback spread adjustment published by Bloomberg became fixed as of March 5, 2021.
For additional information regarding the Libor transition, please visit the following:
- ARRC: https://www.newyorkfed.org/arrc
- Historical SOFR data: https://apps.newyorkfed.org/markets/autorates/SOFR
- ISDA benchmark reform: https://www.isda.org/category/legal/benchmarks/
- Federal Reserve Bank of New York: www.newyorkfed.org
- Summary of the ARRC’s Fallback Recommendations: www.newyorkfed.org
Please note that the information in these FAQs is subject to change without notice.
These FAQs are provided solely for general informational purposes and with the understanding that neither TriState Capital, its affiliates nor any other party is engaging in rendering financial, legal, tax, technical or other professional advice or services, or endorsing any third-party product or service. Any use of this information should be done only in consultation with a qualified and licensed professional who can take into account all relevant factors and desired outcome in the context of the facts surrounding your particular circumstances. These FAQs were developed with reasonable care and attention. However, it is possible that some of the information is incomplete, incorrect, or inapplicable to particular circumstances or conditions. Circumstances concerning the subject matter can change before the FAQs can be updated. NEITHER TRISTATE CAPITAL NOR ITS AFFILIATES SHALL HAVE LIABILITY FOR ANY DAMAGES, LOSSES, COSTS OR EXPENSES (DIRECT, CONSEQUENTIAL, SPECIAL, INDIRECT OR OTHERWISE) RESULTING FROM USING, RELYING ON OR ACTING UPON INFORMATION IN THESE FAQS EVEN IF TRISTATE CAPITAL AND/OR ITS AFFILIATES HAVE BEEN ADVISED OF OR FORESEEN THE POSSIBILITY OF SUCH DAMAGES, LOSSES, COSTS, OR EXPENSES. TriState Capital Bank is an Equal Housing Lender and Member FDIC.