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Transitioning from LIBOR to SOFR
Why does LIBOR need replacing?
Many regulators have been vocal regarding the shortcomings of LIBOR, ultimately leading to the impending end of LIBOR.
The UK’s Financial Conduct Authority (FCA) is responsible for regulating LIBOR. FCA Chief Executive Andrew Bailey has made clear that the publication of LIBOR is not guaranteed beyond 2021, so time is of the essence to prepare for the possibility that the production and availability of LIBOR might cease permanently. The transition from LIBOR is important because the potential disruption or cessation of LIBOR poses a financial stability risk as well as a risk to the individual institutions with LIBOR exposures.
Why is SOFR different than LIBOR?
Unlike LIBOR, the Secured Overnight Financing Rate (SOFR) is calculated based on a broad measure of U.S. Treasury overnight government repo rates. This rate is robust, is not at risk of cessation and meets international standards.
The Alternative Reference Rates Committee (ARRC), the group of private-market participants convened to help ensure a successful transition from LIBOR, is monitoring developments and has created a LIBOR to SOFR transition plan.
What is the FHLBank System doing to prepare for the transition?
Collectively and individually, the FHLBanks are working on the transition. Collectively, the FHLBank System’s Office of Finance has become a leading issuer of SOFR-based debt with $100 billion issued as of Aug. 19, 2019.
Individually, each FHLBank has a transition working group to ensure its members and its Bank are ready for the transition. At FHLBank Topeka, we have created and are making progress on an in-depth plan for the transition that evaluates our current LIBOR exposure through investments, advances, consolidated obligations, etc. Much of the plan deals with making sure our internal systems are ready and able to accept a new reference rate index. Our plan also includes steps to help our members prepare for the transition by sharing communications, such as this web page.
What do I need to do to prepare for the transition?
Here are a few items to consider:
- Inventory your LIBOR exposure.
- Monitor and understand the alternative reference rates choices such as SOFR.
- Create a plan to stop utilizing LIBOR and to transfer your legacy LIBOR exposure to a replacement index. This may require renegotiation of existing contracts and changes to systems.
- Incorporate recommended fallback and trigger language in your contracts.
Back to LIBOR to SOFR page