Everything you need to know to be prepared for the LIBOR-SOFR transition.
What to Know
- It had been recommended that the US Dollar (USD) London Interbank Offered Rate (LIBOR) be replaced by the Secured Overnight Financing Rate (SOFR) as a primary benchmark index. LIBOR is used as an index to calculate interest rates in many financing agreements and most interest rate swaps.
- However, SOFR is a recommended, not required, new benchmark with banks permitted to select their own new benchmarks.
- Objective SOFR spreads are not yet available and, when available, will only be recommended, not required, with banks permitted to select their own new interest rates at their sole discretion.
- The impending transition is expected to disrupt worldwide financial markets. This is expected to pose significant challenges and risks to financial institutions and their borrower clients.
- This will impact any and all non-financial institution companies that have outstanding interest rate swaps and/or loans tied to LIBOR. It is likely that many of these companies are unaware of the proposed transition. Executing what these companies may be provided by their financial institutions, as ‘standard forms,’ will have significant financial and legal ramifications for years to come, and will likely be the subject of major litigation.
- Financial institutions now have the documentation in place to start implementation immediately. Once this documentation is in place, it will be very difficult to change or revoke absent protracted litigation/arbitration.
- While the effective date was previously set for December 31, 2021, it was recently announced that the transition period has been extended through June 2023, presumably due to both the lack of readiness and the complexity of the transition process.
- It is imperative that clients who will be impacted begin to plan and prepare now, especially since the US regulators seem intent that the transition begin immediately.
- As a result of this immediate implementation, all need to prepare including, but not limited to:
- Large and small banks
- Large and small companies
- Insurance companies
- Real estate entities
- Colleges and universities
- Museums and performing arts centers
- Other nonprofits and foundations
- Government issuers and government-sponsored enterprises (GSEs)
- Mutual, pension, private equity, and hedge funds
- Consumer groups
- LIBOR Crosses the Pond, Banking New York, October 1, 2012
- For private plaintiffs, all eyes on possible UBS deal, The National Law Journal, December 14, 2012
- Unlikely Provocateur Emerges to Challenge Libor Class Settlements, Reuters, January 10, 2018
- Where's the Damages? Proposed LIBOR Class Settlements Leave One Objector Wondering, New York Law Journal, January 12, 2018
- Buchwald Signals Defeat for Objections in LIBOR Class Suits, New York Law Journal, January 23, 2018
Court Documents (USD LIBOR Class Action)