The London Interbank Offered Rate (LIBOR), one of the world’s most widely used interest rate benchmarks, is in the process of being discontinued. As the financial services industry shifts away from LIBOR to alternative reference rates, Stifel is providing this information to help you understand how these changes may impact your financial products.
When is LIBOR being phased out?
The transition from LIBOR-based products to alternative reference rates is already underway. Regulators have called for banks to cease the issuance of LIBOR-based products as soon as practicable and by no later than December 31, 2021. LIBOR panel bank submissions for the 1-week and 2-month U.S. dollar LIBOR settings will cease after December 31, 2021, and products tied to these LIBOR tenors must transition to alternative rates by that date. The remaining tenors for the U.S. dollar LIBOR will cease to be published on June 30, 2023.
Which financial products may have exposure to LIBOR?
LIBOR is linked to trillions of U.S. dollars’ worth of financial products. It is associated with a wide range of financial products, including:
Floating-rate notes and bonds, including corporate bonds
Syndicated loans, small business loans, commercial real estate loans, other bank loans, or floating-rate loans
Derivatives, including interest rate swaps
Other products and securities may have exposure to LIBOR as well. Any floating-rate product referencing LIBOR is affected.
What will replace LIBOR?
The Federal Reserve has convened the Alternative Reference Rates Committee (ARRC) to identify a suitable replacement. While the ARRC is recommending the Secured Overnight Financing Rate (SOFR) as its replacement, the financial services industry is also considering other alternatives. Stifel is currently evaluating the alternative reference rates available to determine which option we will offer as an appropriate replacement for LIBOR for each of our loan products. The following asset classes have published transition plans in place.
Government-sponsored enterprises Fannie Mae and Freddie Mac have published a LIBOR Transition Playbook, which includes timelines for beginning acquisition and issuance of SOFR-indexed products, and ceasing acquisition and issuance of LIBOR-indexed products. The Playbook contains information about agency-issued adjustable-rate products, including single-family adjustable-rate mortgages (“ARMs”) and securities, i.e., mortgage-backed securities (“MBS”) and participation certificates (“PCs”); single-family credit risk transfer (“SF CRT”) transactions; collateralized mortgage obligations (“CMOs”); Fannie Mae multifamily (“MF”) ARMs and MBS; Freddie Mac MF floating-rate loans and securities; and multifamily CRT (“MF CRT”) transactions. The Playbook also describes key transition milestones and recommended actions for stakeholders to consider as they manage the upcoming transition from LIBOR. The Playbook can be accessed here: https://capmrkt.fanniemae.com/resources/file/LIBOR/pdf/playbook.pdf.
The International Swaps and Derivatives Association (ISDA) has a plan to transition to replacement rates, and has issued protocols and recommended contractual fallback language for derivatives products. SOFR is the recommended replacement rate for U.S. dollar-denominated derivatives. Additional information can be found at: https://www.isda.org/2020/05/11/benchmark-reform-and-transition-from-LIBOR.
What are the risks associated with the transition away from LIBOR?
You may hold certain investments, loans, or derivatives that use LIBOR as a benchmark. The impact could vary across different types of financial products referencing LIBOR, and even between transactions in the same type of product. It is important that you review and understand the governing terms of your financial products. Some existing LIBOR-based financial products do not provide for a replacement rate. In those situations, the underlying contracts for these products may need to be amended to include language that designates a replacement rate. In addition, the new or replacement rate may not act as intended. The composition or characteristics of an alternative reference rate may differ in material respect from LIBOR, and may not result in a rate that is the economic equivalent of the LIBOR rate. If you enter into or acquire a LIBOR-based financial product and hedge with a derivative, there could be differences in the respective interest rate fallback provisions. If the result is a material interest rate mismatch between the two financial products, this could expose you to “basis risk” and otherwise undermine the effectiveness of the derivative as a hedge. Issuers have no obligation to consider your interests in calculating, adjusting, converting, revising, discontinuing, or developing any reference rate, alternative reference rate, or fallbacks. You should assess your exposure to LIBOR-linked financial products. Depending on the complexity and degree of uncertainty surrounding a financial product’s reference rate or alternative reference rate, the transition away from LIBOR may adversely affect the financial product’s economics, including its price, market valuation and liquidity, the usefulness for its intended purpose, the timing or amount of payments or deliveries, and, if applicable, the ability to exercise any option rights. You may wish to take steps to reduce your exposures.
How is Stifel preparing for the transition?
Stifel is committed to ensuring an orderly and successful shift away from LIBOR. We are engaged with industry groups to stay up to date on key developments and are actively working on changes to our LIBOR-based products and contracts to ensure readiness for the transition. We will continue to follow developments, take necessary measures, and provide critical information to support a smooth transition for you. In the meantime, we recommend that you stay engaged with the transition and consider its potential impact on your financial products.
What additional information is available?
For further guidance on preparing for LIBOR to be discontinued or materially change, please consult with your legal, tax, financial, and other professional advisors, and review the following resources from key industry participants:
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