INSIGHT

Is Your Lending Operation Ready for the LIBOR Transition?

Recent market surveys suggest that many corporations are not. Here are the questions bank leaders need to ask as they seek to understand the end of LIBOR.

Peter D. Antonoplos.

Washington D.C., January 17, 2020 – With the London interbank offered rate (LIBOR) being left behind by financial markets at the end of 2021, the Secured Overnight Financing Rate (SOFR) has been chosen by the Alternative Reference Rates Committee (ARRC) as the alternative to the LIBOR index in the United States. The change to SOFR has already begun as the issuance of funds based upon this index have increased from $2 billion in 2018 to $50 billion at the end of 2019.  The weekly swap-trading volume from this benchmark has also tripled during 2019 from around $5 billion to $14 billion. The end of LIBOR is eminent as the Federal Reserve, the Securities and Exchange Commission, and the Commodity Futures Trading Commission have each taken part in initiating change by offering regulatory relief and authoring transition guidance for financial institutions. The Bank of England has also created literature focused on bank boards, management teams, and other key stakeholders present within European financial markets.

The sudden transition away from LIBOR has shocked many within the financial industry.  Thus, it is imperative that banks adapt quickly or run the risk of falling behind on the most significant and complex change in the financial industry this century. Financial firms are going to have to invest extensive time and money in adapting contracts, models, and systems to transition to the new index rates. With an estimated 50-75 percent of banks’ models involving LIBOR, the majority of financial systems will require some amending.  Finally, more than 80 document types will need to be reviewed by both large and small banks for modifications.

The first major reaction to the end of LIBOR comes from the International Swaps and Derivatives Association (ISDA), which is focused on creating fallback language for most LIBOR-related derivatives contracts by stipulating the terms and the rates that will prevail in a post-LIBOR world. Though the derivatives market is what the ISDA is currently focused on, these contract provisions are likely to serve as a basis for fallback language within the cash market.

There are continued LIBOR-related changes in the makings, including the Q1 2020 Comprehensive Capital Analysis and Review (CCAR) submission to the Fed, and the clearing house adoption of SOFR to calculate interest on collateral and discount cash flows in H2 2020.  Each of these events will have significant and complex implications for banks and their borrowers.

Banks preparations have only become more urgent as issues with possible LIBOR successors have occurred. A spike in the overnight repurchase market rates has affected the volatility of SOFR, with rates derived from this index doubling from 2.43 percent to 5.25 percent in only one day. While the Fed has worked to stabilize the market, in the long term, sizable moves are less likely to occur under SOFR as this index is averaged over a longer time period than was true for LIBOR.  However, this shift has captured bankers attention and pushed them to act quickly in regards to the end of LIBOR.

While many banks are scrambling to move forward without relying on LIBOR, most continue to struggle with the transition. Market research from recently surveyed large and regional banks has shown that most organizations have begun to inventory their financial exposures to the end of LIBOR.  However, almost all of these participants have not been able to translate their own research into quantified risks, with specific metrics, made applicable under different scenarios. Furthermore, no participants have developed detailed plans to remediate their contracts, systems, and models over the next 2 year or planned how to combat contracts which continue after 2021 yet LIBOR is still the chosen index. Overall, there is lacking evidence suggesting that most banks have addressed specific client needs or knowledge concerning the rate changes and complexity associated with their unique LIBOR exposures.

Antonoplos & Associates proposes six critical questions that corporate leaders should address in order to smooth the transition from LIBOR to another index: 

  • Top team and board awareness: Are the CEO and management team receiving regular updates on risk exposures and transition preparedness? Are key committees regularly informed by the progress and included in key decisions?
  • Exposure reporting: Can your organization quantify LIBOR exposures, both financial and operational, across all systems, models, and contracts? Is your current exposure to LIBOR growing or falling and can you predict these trends into the future?
  • Transition plans: What is the month-by-month transition plan and are accountable leaders appointed for every action? Has this plan been checked for gaps or existing overlaps?
  • Resourcing: How complete is the budget for the LIBOR transition? Does it cover all critical areas, including repapering, model redevelopment and validation, and systems remediation?
  • Risk assessment: Have key transition risks been defined, identified, and prioritized? Which areas are most concerning?
  • Opportunity identification: By being first to the market with new financing and treasury products tied to the new reference rates, you bank can become a standout partner for client growth.

The Antonoplos & Associates financial services branch provides our diverse base of banking clients with a comprehensive range of solutions for LIBOR loan related legal issues. Our LIBOR practice provides the banking industry with over twenty years of client focused practice in title litigation, loan modification, title curation and equitable subrogation resolutions in connection with loan portfolios.  By striving to holistically understand the issues that our clients face, our financial services attorneys’ are able to provide forward thinking loan documentation and amendments through title curative actions including the correction of legal description errors, resolution by judicial action, equitable subrogation, and securing releases of prior liens, mortgages, and deeds of trust while also prescribing remedies for corrections to promissory notes and deeds of trust. 

Antonoplos & Associates financial services lawyers routinely litigate equitable subrogation matters on behalf of nationally and locally chartered banks. Our clients include mortgage lenders, mortgage servicers, banks, banking associations, and other financial institutions including the title insurance industry. Overall, our LIBOR attorneys’ have extensive experience representing loan portfolios and managing mutli-jurisdiction loan modifications and litigation for clients located within the financial services industry. 
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Peter D. Antonoplos, Esq.Partner
Antonoplos & Associates, Attorneys At Law
1725 Desales Street, N.W.Suite 600,
Washington, D.C. 20036
Phone:(202)-803-5676
Fax:    (202)-803-5677
Email: Peter@ AntonLegal.com
web: www.AntonLegal.com