The time for transitioning from the London Interbank Offered Rate (LIBOR) is quickly approaching with the looming May 2021 deadline and there are things for your lending group to consider in the meantime. Professionals need to create a forward-facing view and road map to achieve the transition as smoothly as possible. Even if only a very small portion of your portfolio is going to be affected, most lenders will have some considerations to make.
The Alternative Reference Rates Committee (ARRC) was tasked and has attempted to get a market/transaction-driven substitute in place. That substitute being a Secured Overnight Financing Rate (SOFR). Technically the CME Group launched SOFR back in May 2018, but it is really gaining steam recently.
Most of the urgency that banks are currently experiencing in this regard results from wanting to be proactive on the transition so as not to lose market share. The potential risk management impacts do include strategic and reputational, operational, legal, and financial risk, so it is important to have some best-laid plans at this time. Another relevant aspect concerns any legacy portfolios maturing pre-2021 expected to renew at the historical rate and will be migrated to alternative rates beginning in the current year, 2020.
Considerations:
Key considerations to make within your organization include:
- Senior management accountability and monitoring to oversee the delivery and coordination of the company-wide program.
- Clear ownership and accountability in the businesses and functional areas for implementation.
- A central LIBOR transition office may provide centralized management, coordinated strategy, planning, budgeting, steering, and oversight.
- Implement contract stage monitoring as a key component.
- Plan a centralized channel of communication to keep all internal staff with the same up-to-date information.
- For the communication portion, this can be done in a number of ways including an internal site, emails, conference calls, and meetings, as long as you can ensure communication is consistent and employees know where it will be coming from.
Regulations
Regulators are gaining feedback as they look to increase the focus on this type of compliance drastically in the years to come. One of the main things that will be assessed from a regulatory standpoint is your budget allocated to dealing with the process. Each bank budget will vary based on the size of the institution, but the main thing is having one and knowing in detail what parts are going into that budget. Another piece to have in place will be your specific groups designed to handle the bank’s resulting exposure.
Most lenders highly covet term rates and though they prove to be a helpful tool, they are not yet available in this new setting. Although they are currently being worked on in the process for banks.
Lastly, it is important to note that a Market Value Transfer will not be considered a taxable event as long as no other terms change so that it is purely transferring LIBOR to SOFR.
Even though financial institutions still have time before the May 2021 deadline, the regulator’s subtle encouragement is in the rearview as you turn your institution’s vehicle right on to “Supervision Drive”, and without a plan, there could be gaping potholes in the form of mounting financial contract issues to come.
For further details about changes and how they may affect what you do please contact a legal professional. We’ll be here behind the scenes supporting both them and you.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.