The LIBOR transition
Financial benchmark reforms are happening across the world and we, and many of our clients, counterparties, and investors and other stakeholders, are impacted. It is important for all parties to understand what these reforms entail and how the reforms affect them.
One of the largest impacts to BBVA USA is the anticipated replacement of the interest rate benchmarks known as the London Interbank Offered Rates (LIBOR).
What is LIBOR?
LIBOR is an interest rate benchmark based on the costs of wholesale unsecured credit as reported by various “panel” banks and is published daily by ICE Benchmark Administration Limited (“IBA”). IBA is regulated by the U.K. Financial Conduct Authority (FCA). LIBOR is the most widely used interest rate benchmark in the financial markets. As of year-end 2020, it is estimated that there are more than $200 trillion financial products and transactions (e.g., derivatives, loans, bonds) that reference U.S. Dollar LIBOR. In addition to rates quoted in U.S. Dollars, LIBOR includes rates quoted in Euros, Pounds Sterling, Swiss Francs, and Japanese Yen.
Why and when is LIBOR likely to be replaced?
LIBOR is an unsecured rate and is not based on a transparent, widely traded market. Over time, especially since the 2008 financial crisis, there have been fewer observable transactions underlying LIBOR, and, as a result, LIBOR has been based more upon expert judgment. In 2014, the Financial Stability Board (FSB), an international body that coordinates national financial authorities to promote financial stability, reviewed market changes and claims of financial market manipulation, as well as emerging international standards for financial benchmarks, and published recommendations to reform major interest rate benchmarks including LIBOR. See FSB, Reforming Major Interest Rate Benchmarks (July 22, 2014). Also during 2014, the Alternative Reference Rates Committee (ARRC) was jointly convened by the Federal Reserve and the Federal Reserve Bank of New York to identify risk-free alternative reference rates to U.S. Dollar LIBOR, identify best practices for robust contracts that are able to withstand the termination or alteration of U.S. Dollar LIBOR, and create a plan for the voluntary adoption of alternative rates by market participants.
In 2017, the panel banks making submissions to IBA that support LIBOR agreed with the FCA to continue making those submissions through December 31, 2021. Accordingly, the ARRC's "Paced Transition Plan" contemplated an end to the financial markets' use of U.S. Dollar LIBOR by the end of 2021.
In December 2020, however, IBA issued a public consultation on its intention to extend the publication of certain dominant tenors of USD LIBOR until June 30, 2023. On March 5, 2021, IBA formally announced that it will stop publishing major USD LIBOR tenors (overnight, one month, three month, six month and twelve month) in mid 2023 and that it will stop publishing the lesser used tenors (one week and two month) at 12/31/21.
The Federal Reserve Board, the FDIC, and the OCC have issued supervisory guidance encouraging banks to stop entering into new contracts that use U.S. Dollar LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. The ARRC has updated their website with a Guide on the Endgame for USD LIBOR.
What is LIBOR’s replacement and what does this mean for BBVA USA?
In 2017, the ARRC recommended the Secured Overnight Financing Rate (SOFR) as the replacement for LIBOR. SOFR is a secured overnight rate based on the market for U.S. treasury repurchase (repo) transactions. SOFR is published daily by the Federal Reserve Bank of New York. Its anticipated adoption in markets for derivatives, loans and other products and transactions will cause interest rate accruals and calculations and related processes to change for both BBVA USA and our clients.
The transition from LIBOR is a significant and important change for BBVA USA. We are working diligently on reviewing and updating our processes and systems and our legal agreements. We are also developing and implementing plans to facilitate a transition away from LIBOR and minimize disruption. Meeting the needs of our clients will continue to be our focus. As the use of SOFR in transactions in the markets continues to grow, we are evaluating how we can most effectively assist our clients with new products and transactions and how best to address existing LIBOR-based products and transactions.
How the Libor Transition may impact BBVA USA and what are the steps to prepare for the change?
The transition away from LIBOR to SOFR is significant not only to us and other financial institutions, but is important to our clients as well. The transition is still evolving and there are questions outstanding, but it is moving rapidly. The ARRC has a website containing information about the transition and its proposed timeline. It can be accessed at https://www.newyorkfed.org/arrc.
With regard to preparing for the transition, for informational purposes the ARRC has published two checklists that may contain information or suggestions relevant to certain types of organizations.
If you need information related to your relationship with us as it relates to this transition, please contact your BBVA USA banker.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial consultant about your personal situation. Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA and its affiliates do not provide, are not responsible for, and do not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards. BBVA and BBVA Compass are trade names of BBVA USA.
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