Pub. 10 2019 Issue 2

www.wvbankers.org 16 West Virginia Banker T he London Interbank Offered Rate (LIBOR) has been used for over three decades as the global standard benchmark for pricing all types of financial transactions, from small business loans to globally syndicated derivative structures. Now, that will soon be changing and financial institutions will need to adjust their loans to a new bench- mark, the Secured Overnight Financing Rate (SOFR). So, what is involved in this transition and how can banks minimize the potential risks? The Background of LIBOR Since its launch over three decades ago, LIBOR has been the market standard benchmark for pricing all types of financial transactions; from small business loans to globally syndicated derivative structures. It represents the average of money market funding rates surveyed from about 16 lead- ing banks in London. However, following banking reforms instituted after the 2008 financial crisis, money market interbank funding activity expe- rienced a sharp and sustained decrease in activity. As such, the surveyed rates underpinning LIBOR have increasingly re- lied on “expert judgment” as opposed to actual transactions. This reliance on fewer underlying transactions has created growing concern about LIBOR as an accurate reference for trillions of dollars of transactions tied to LIBOR. The concern has accelerated over recent years, as the financial institutions providing the surveyed rates will no longer be required to do so after 2021. What is SOFR? Responding to these concerns, the ARRC established the Secured Overnight Financing Rate (SOFR) as the replace- ment index for USD LIBOR in 2018. The FRBNY then launched publication of SOFR on April 3, 2018 at 1.80%. The FRBNY publishes the index daily by 8:00 a.m. Eastern Time. LIBOR to SOFR – Making a Successful Transition By Dennis Falk, SVP, Regional Manager, PCBB