It was widely regarded as ‘the world’s most important number’ before Andrew Bailey, the chief executive officer for the UK’s Financial Conduct Authority (FCA) and the regulator for the London Interbank Offered Rate (LIBOR), outlined its deficiencies and announced in 2017 that it would no longer compel LIBOR panel banks to publish the rates after 2021, making clear that reliance on LIBOR could no longer be assured beyond this date.
Although the ICE Benchmark Administration Limited’s (IBA) announced its intention to allow most USD LIBOR to continue significantly beyond the end-2021 deadline, nobody should take this as a reason to delay the transition. Regulators at the US Federal Reserve, Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) issued direct supervisory guidance last year that lenders should stop linking new loans and other financial instruments to LIBOR as soon as practicable, but in any event by the end of 2021.
The transition away from LIBOR and other Interbank offered rates (IBOR) benchmarks created an uncertain future for banks and corporate treasures that many have preferred not to think about over the last two years. However, the Federal Reserve Board and state regulators have now confirmed that they will start to assess LIBOR transition plans as part of the regular examination process. With the deadline fast approaching (and yes, there is a lot to be done), there are now programs being instituted at financial services firms to study the impact of LIBOR’s permanent cessation, although the broader market and mid-market firms are yet to make any real progress.
This paper is aimed for the benefit of financial services companies, corporate treasury departments, and other end-users of LIBOR and other IBOR products. Despite knowing of its importance, few people understand LIBOR’s wide-reaching impact, the efforts that are currently underway across industry groups, and what they need to do to eventually transition to an alternative risk-free rate (RFR). The paper includes a refresher on LIBOR fundamentals, an analysis on the industry’s preparedness and a discussion on the approach to contract analysis and repapering that is required for transition of contracts to an RFR. As program managers, lawyers, and operations experts embark on the path to LIBOR transition, they would benefit from combining a project-management based approach with technology-enabled solutions discussed in this paper.
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