LIBOR Transition Summary
In 2017, the Financial Conduct Authority (FCA), which regulates LIBOR, announced it would no longer guarantee LIBOR production beyond 2021. The impending end of LIBOR has become a key issue facing financial markets as it is one of the most widely used reference rates, with nearly $200 trillion of derivatives, loans, securities, and mortgages referencing USD LIBOR (as of 2016). With such a considerable volume of contracts tied to LIBOR, a smooth transition from LIBOR to a new reference rate is crucial to the stability of financial markets.
The Federal Reserve tasked the Alternative Reference Rate Committee (ARRC), a group of market participants, with developing a rate to replace LIBOR and ensuring a successful transition. In 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) to be the recommended successor rate to USD LIBOR.
Since SOFR was identified to replace LIBOR in the United States, a paced transition plan has been underway and led by the ARRC. As LIBOR is wide-spread throughout the financial markets, it is possible that members will be affected by the transition. FHLBank Chicago published Frequently Asked Questions and a Transition Primer PDF to inform our members on the transition progress, market developments, and suggested action items from ARRC and ISDA.
FHLBank Chicago is continually monitoring SOFR developments from ARRC and in the markets and will continue to update our members.
LIBOR Transition News from FHLBank Chicago
- January 22, 2021 | LIBOR Transition Update
- June 26, 2020 | Reminder: Advance Products with a LIBOR Component Changing July 1, 2020
- March 19, 2020 | FHLBank System Regulator Provides LIBOR Transition Guidance
- March 19, 2020 | Leaving LIBOR: Plan Now for a Smooth Transition
- December 13, 2019 | Changes Coming to Collateral for LIBOR Transition
- December 2, 2019 | Libor Financing Alternative
- September 27, 2019 | FHLBank System Regulator Provides LIBOR Transition Guidance
- February 27, 2019 | SOFR Update: SOFR-Indexed Advance To Be Available on Thursday, February 28
- January 31, 2019 | SOFR Update: SOFR-Indexed Advance Planned for February
- January 16, 2019 | SOFR Update: FHLBank Chicago Issuance This Month
- December 21, 2018 | SOFR as a LIBOR Index Alternative
- April 21, 2021 | CME announced the launch of CME Term SOFR reference rates for 1-month, 3-month and 6-month tenors. The rates are based on CME’s underlying SOFR futures and are aligned with the ARRC’s principles for forward term rates. The benchmarks are initially limited to cash market transactions until June 30, 2023.
- March 5, 2021 | The Financial Conduct Authority (FCA), LIBOR’s regulator, has announced that all LIBOR benchmark rates will either cease to be provided by any administrator or no longer be representative after December 31, 2021 for 1-week and 2-month LIBOR, and after June 30, 2023 for all other LIBOR tenors. The announcement constitutes an index cessation event under the ISDSA IBOR Fallbacks Supplement and the ISDA 2020 Fallbacks Protocol, which means a spread adjustment may now be fixed for each LIBOR tenor. When LIBOR is no longer published, the fallbacks for derivatives under ISDA’s protocol would shift to SOFR plus the spread adjustment that has now been fixed.
- November 30, 2020 | Various regulators, including the Federal Reserve, FDIC, and OCC, released concurrent announcements encouraging banks to stop new USD LIBOR issuances by December 31, 2021. It was also proposed the one week and two month LIBOR settings would end at that time, while all remaining LIBOR tenors would continue to be published until June 30, 2023. The latter date would allow for most legacy contracts executed before January 1, 2022 to mature within that timeframe. ICE, LIBOR’s administrator, is expected to consult in early December on these developments.
- September 21, 2020 | ISDA sent a letter to the Federal Reserve and Financial Conduct Authority (FCA) regarding the effective date for adoption of the ISDA fallback protocol on legacy and new derivative contracts. ISDA plans to push the effective date to the second half of January 2021 in order to avoid operational risks at year-end.
- August 18, 2020 |The ARRC published transition resource guides for adjustable rate mortgages and private student loans. These resource guides include recommendations, tools, templates, and other guidance to help transition these loans to a new reference rate. The guides consider both the operational and the consumer side of the transition.
- July 31, 2020 | Beginning on August 3, 2020, Fannie Mae begin accepting single-family ARMs indexed to SOFR, as well as begin issuing SOFR-based ARMs. Multifamily ARMs indexed to SOFR are expected to be accepted and issued sometime in Q4 2020.
- July 21, 2020 | ISDA announced that Bloomberg has begun calculating and publishing fallbacks for US dollar LIBOR. The calculations include the adjusted rate compounded in arrears, the spread adjustment, and the ‘all in’ fallback rate.
- July 9, 2020 | The ARRC released a document focused on transitioning internal systems and processes to SOFR. It identifies processes and systems that may need to be updated to successfully transition to a new reference rate.
- June 30, 2020 | ARRC announced further details to its recommended spread adjustments for cash products that have incorporated hardwired fallback language or for legacy contracts where a spread-adjusted SOFR is the fallback. Both adjustments better match ISDA’s spread adjustment methodology. The value of the spread adjustment will match ISDA’s spread adjustment value. In the event of a pre-cessation trigger, the spread adjustments will be determined at the same time as ISDA’s.
- June 22, 2020 | Edwin Schooling Latter, head of Markets Policy at the FCA commented, “We know that LIBOR will continue until end 2021, but announcements about the discontinuation from the end of 2021 of LIBOR settings could come as early as November or December this year.” He continued, “Market participants need to be ready for that.”
- May 27, 2020 | ARRC published recommended best practices for market participants to better prepare for the cessation of USD LIBOR. These best practices are to clarify timelines and interim milestones in the transition for both cash products and derivatives.
- May 14, 2020 | ISDA published a report that summarizes the final responses to its consultation on the implementation of pre-cessation fallbacks for derivatives referenced to LIBOR. The majority of respondents support including both pre-cessation and permanent cessation fallbacks.
- April 15, 2020 | The ARRC published its recommendation of a spread adjustment methodology for cash products. It recommends using a historical median over a five-year lookback period to calculate the difference between USD LIBOR and SOFR. This aligns with ISDA’s recommendations for derivatives.
- March 2, 2020 | The Federal Reserve Bank of New York began publishing 30-, 90-, and 180-day SOFR Averages as well as a SOFR Index on its website. It plans to publish indicative historical rates for these averages and the index in the coming weeks.
- February 5, 2020 | The Federal Housing Finance Agency (FHFA) announced new steps to be taken by Fannie Mae and Freddie Mac as they transition away from LIBOR. New language will be required for single-family Uniform Adjustable Rate Mortgage (ARM instruments closed on or after June 1, 2020. All LIBOR-based single-family and multifamily ARMS must have loan application dates on or before September 30, 2020 to be eligible for acquisition. And lastly, acquisitions of single-family and multifamily LIBOR ARMS will cease on or before December 31, 2020.
- November 15, 2019 | Fannie Mae announced it will be implementing ARRC’s recommended fallback language into the uniform notes and other legal documents for ARMS. Additionally, Fannie Mae will offer several new ARM products based on SOFR, with more details forthcoming in 2020.
- October 22, 2019 | The CME Group also developed a high-level proposal for transitioning price alignment and discounting for USD-denominated over-the-counter cleared swaps from the effective federal funds rate to SOFR.
- October 21, 2019 | The ISDA summarized responses to a consultation on how derivatives contracts should address a regulatory announcement that LIBOR or certain other interbank offered rates (IBORs) are deemed no longer representative of an underlying market.
- October 8, 2019 | The United States Department of the Treasury and the Internal Revenue Service released proposed regulations providing tax relief on tax issues that may arise as a result of the modification of debt, derivative, and other financial contracts from LIBOR-based language to alternative reference rates.
- September 24, 2019 | The ARRC closed a consultation on proposed improved fallback language for new Adjustable Rate Mortgage (ARM) contracts that reference USD LIBOR in order to mitigate the risks associated with the potential end or disruption of LIBOR after 2021.
- September 19, 2019 | The ARRC released a practical implementation checklist with ten key areas to help market participants transition away from U.S. dollar (USD) LIBOR to using the Secured Overnight Financing Rate (SOFR)
- September 18, 2019 | The ISDA published its consultation on final fallback parameters for derivative products based on the preferred approaches listed below. Rate: SOFR Term Adjustment: Compounded Setting in Arrears Credit Spread Adjustment: Historical Mean/ Median Approach Both the amended 2006 ISDA Definitions to be applied to new LIBOR trades and the fallback protocol for legacy IBOR contracts are expected to be finalized by the end of this year, with implementation in 2020.
- September 17, 2019 | The CME Group announced that CME SOFR futures became a trillion-dollar market. Record single-day volume of $670 billion was traded with $1.17 trillion in open interest, in response to the upward pressure in the repo market.
- September 4, 2019 | The CME Group announced it will launch options on 3-month SOFR futures starting on January 6, 2020, pending regulatory review.
- July 31, 2019 | The ISDA announced that Bloomberg Index Services Limited (BISL) has been selected to calculate and publish adjustments related to fallbacks that ISDA intends to implement for certain interest rate benchmarks in its 2006 ISDA Definitions.
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In addition, certain information provided on this page speaks only as of the particular date or dates included, and the information may have become out of date. FHLBank Chicago does not undertake an obligation, and disclaims any duty, to update any of the information included on this page. Because the situation relating to the LIBOR transition continues to evolve, information here may become stale at any given time. Last updated March 31, 2020.