Whether SOFR or an alternative rate is selected as a replacement for LIBOR, before the clock strikes midnight to end 2021, your bank will want to be positioned for transition.
The discontinuation of the London Interbank Offered Rate (LIBOR) will have far-reaching effects on contracts in the financial industry, ranging from standard loan contracts to complex derivatives and debt transactions. The first article in our LIBOR transition series, “The End (of LIBOR) Is Near. Is Your Bank Ready to Transition?,” discusses the background for this change and outlines steps banks can take to prepare. The second article, “Need a LIBOR Transition Plan? We Can Help,” provides a framework for comprehensive transition planning. This article targets executing on key items in the transition plan, such as LIBOR alternative rate analysis and selection and contract management imperatives.
Selecting the best LIBOR replacement rate
Many banks are considering a move to a secured rate, such as the Secured Overnight Financing Rate (SOFR). SOFR contrasts with LIBOR, which is an unsecured rate incorporating the notion of credit risk. LIBOR is a forward-looking rate published for different tenures that incorporates a term premium to capture credit risk exposure over that defined time horizon; SOFR is a backward-looking overnight rate based on actual transactions.