If your clients have adjustable-rate debt or in floating-rate corporate or municipal bonds, start preparing them now for the end of Libor. The London Interbank Offered Rate, which is the reference rate for these and other loans and bonds, is due to expire at the end of 2021 and be replaced with another reference rate, which in the U.S. will mostly likely be the Secured Overnight Financing Rate (SOFR), developed by the Federal Reserve Bank of New York.
“2022 feels like it’s a long way away, but believe it or not 901 days can disappear, almost in an instant,” New York Fed President John Williams said at a Libor Transition Briefing in New York City on July 15 held by the Securities Industry and Financial Markets Association. That’s less than the number of days Donald Trump has been president of the United States.
“Don’t wait until Jan. 1, 2022 to manage your business’ transition away from Libor because it’s going to be too late,” warned Williams. “The clock is ticking.”
(Related: NY Fed Introduces Libor Substitute)
Currently an estimated $200 trillion worth of financial contracts are based on a spread to U.S. dollar Libor. The rates, set by a panel of private British banks, have lost legitimacy following revelations in 2012 that several banks had colluded to manipulate Libor, costing billions in overpayments by borrowers.
(Related: LIBOR Manipulation May Have Spanned Decades)
The new SOFR rate is based on $1 trillion worth of U.S. Treasury overnight repurchase agreements (repos) per day. In contrast, the three-month Libor is based on $1 billion worth of transactions. On July 18, the three-month Libor was 2.28%; the overnight SOFR was 2.46%.
(Related: Libor’s Looming Demise Is Huge, Risky Task)