Preparing for the Replacement of LIBOR

What We Can Do For You  |  Events  |  Defining LIBOR  |  Why LIBOR is Important  |  Why LIBOR is Being Replaced  |  Timeline  |  Replacement Options  |  More on LIBOR

The anticipated replacement of the London Interbank Offered Rate (LIBOR) as an index for pricing loans, debt and derivatives will be a dauntingly complex and time-consuming undertaking.

Our team has been deeply involved in this process, having commented repeatedly and participated in meetings convened by the Federal Reserve Bank of New York with the Fed's Alternative Reference Rate Committee (ARRC) and all the major trade organizations.

Our Latest Analyses on LIBOR

What We Can Do For You

United States Federal Reserve in Washington DC

— Prepare you for the litigation and antitrust risks associated with the transition from LIBOR to one of its successors

— Address the challenges related to the transition in your legacy deals

— Update new deals to clearly utilize the market’s adopted LIBOR transition mechanics

— Advise on the implementation of LIBOR’s replacement


Webinar: Navigating the LIBOR Transition Within the CRE Industry

Tuesday, October 8, 2019 | 2-3:30 p.m. (EST)

MBA Education, Dechert partner Richard Jones and other industry experts discussed critical changes coming to the industry as a result of the LIBOR transition and how to begin successful transition planning for your organization.

What is LIBOR, and How Does it Work?

LIBOR (sometimes referred to as ICE LIBOR) is a benchmark for short-term interest rates, currently calculated for five currencies (USD, GBP, CHF, EUR and JPY) and seven tenors for each of these currencies. It is intended to be a measure, for each currency and tenor, of the average rate at which leading internationally-active banks are willing to borrow wholesale, unsecured funds in the London interbank market.

The methodologies used to determine LIBOR for a particular currency and tenor are based on submissions made by panel banks to the LIBOR benchmark administrator, ICE Benchmark Administration Limited (IBA), each London business day. The methodologies and panel banks per currency and tenor used are disclosed on IBA’s webpage.

IBA is the “benchmark administrator” for all LIBORs for the purposes of the EU Benchmarks Regulation, and, as a UK-based benchmark administrator, is regulated in the UK by the Financial Conduct Authority. LIBORs are categorised as “critical” benchmarks for the purposes of the EU Benchmarks Regulation, and as with all benchmarks used in the financial markets (and pursuant to post-financial crisis legislation such as the EU Benchmarks Regulation), LIBOR for any particular currency or tenor must be demonstrated to be determined using robust methodologies and sufficient and reliable market-based data. The robustness and reliability of LIBOR as a benchmark depends, therefore, on the submissions made by the panel banks, and on an active interbank unsecured lending market.

The LIBOR rate determined for a particular currency and tenor can influence the amount of interest you pay on a wide range of financial products, including mortgage loans, credit cards and (in the U.S.) private student loans.

Why is LIBOR Important?

LIBOR tied to student loans, mortgages, credit cards, and other products

More than $350 trillion in derivatives and other financial products are tied to LIBOR, in addition to nearly every floating rate commercial real estate loan.

When the new index arrives, these trillions of dollars will, over time, have to be repriced to the new index. You will likely have a significant portfolio of financial assets and hedge products, all of which will require transition.


Why is LIBOR Being Replaced?

Regulatory investigations in Europe and the United States revealed some manipulations of LIBOR to make a profit. These investigations led to millions of dollars in fines and undermined public confidence in LIBOR. In addition, the volume of interbank lending has decreased since the global financial crisis of 2008, and panel banks that contribute to the production of LIBOR have had to rely on their expert judgment for some of their contributions.

Andrew Bailey, the Chief Executive of the Financial Conduct Authority (FCA), announced in a speech in July 2017 that all of the 20 panel banks that contribute to LIBOR had agreed to continue their contributions until the end of 2021. Mr. Bailey also said that after 2021, the FCA would no longer persuade or compel panel banks to contribute to LIBOR.

As a result, it is anticipated beginning in 2022 that panel banks will end their contributions to LIBOR. Regulators have signaled that they may declare that LIBOR is unrepresentative once even a single panel bank ceases its contributions to LIBOR. LIBOR is unlikely to continue to function as an index if declared unrepresentative.

What is the Timeline?

LIBOR may cease to function as an index on January 1, 2022.

What is Replacing LIBOR?

In many jurisdictions this is still being determined. Different currencies will use different options. The majority of LIBOR replacements will be derived from risk-free overnight rates. Here is a brief summary of these rates.

LIBOR replacement options SOFR SONIA SARON TONA

SOFR (Secured Overnight Financing Rate)

Proposed by the Federal Reserve Bank of New York, SOFR is based on the cost of overnight loans, using repurchase agreements secured by U.S. government securities.

Unsecured Overnight Rate

Proposed by the European Central Bank, this rate is based on transaction data available to member central banks.

SONIA (Sterling Overnight Index Average)

Proposed by the United Kingdom, SONIA is based on the unsecured overnight funding rates of banks and building societies.

SARON (Swiss Average Rate Overnight)

Proposed by Switzerland, SARON is based on repo rates administered by the SIX Swiss Exchange.

TONA (Tokyo Overnight Average)

Proposed by Japan, TONA is based on unsecured money market rates administered by the Bank of Japan.

More on LIBOR

You can find more of our LIBOR thinking below and on Dechert's Crunched Credit blog, which provides legal commentary on the commercial real estate debt market.

Killing LIBOR: A Victory for Irrational Rectitude — August 2019

LIBOR, Again (Sorry!) — March 2019

A Break from the “B” Word – LIBOR and Benchmark Reform – Progress has the Wind in its Sails — October 2018

Night of the Living Dead: LIBOR Playing a Zombie in a Reality Near You! — August 2018

More Fun with LIBOR — April 2018

LIBOR - Where Are We Now? — April 2018

The End of Days (Or At Least LIBOR) — July 2017

What if LIBOR is Disrupted? — July 2012