The London Interbank Offered Rate (LIBOR) is one of the most important and highly used interest rates in the world. A market standard since 1986, it underpins an estimated $400 trillion in tens of millions of contracts.
But it’s on its way out.
LIBOR is being phased out by the end of 2021 due to a shift to risk-free rates (RFRs). That could lead to some serious disruptions for organizations—unless action is taken now. Companies that use LIBOR rates need to take steps today to speed up the phase-out.
Here’s the challenge: Most organizations aren’t ready for the shift away from LIBOR. Our 2019 study found that less than 20 percent of leaders surveyed have a transition program that they feel can get the job done. Even more telling, many underestimate just how complex and impactful the LIBOR transition will be.
Leaders are also suddenly facing major consequences of the global pandemic. They’re having to rapidly adjust to the changing needs of their people, customers and suppliers—all while navigating ever-evolving operational and financial challenges.
So now more than ever, all impacted organizations should have a clear and actionable LIBOR transition plan in place. The good news is that there’s still time to make those critical strategic moves. An end to end contract management capability delivered by a Compliance as a Service (CaaS) provider can help you avoid pitfalls and mitigate risks throughout the process.
What’s changing and when?
The United Kingdom regulatory body that oversees LIBOR announced it will stop compelling banks to provide their estimates for the LIBOR rate on December 31, 2021.
The volume of interbank lending based on LIBOR declined in the wake of the financial crisis. Changes in money market funds and bank regulations mean that the underlying market that LIBOR measures is no longer sufficiently active.
This means all contracts affected by LIBOR moving forward will be Business As Usual (BAU), and should incorporate and reflect the change.
But there’s more.
Organizations are in the process of identifying the benchmark rate they will use to replace LIBOR and it looks like there will no longer be one global benchmark rate. For example, many companies based in the United States will use the Secured Overnight Financing Rate (SOFR), while many companies in United Kingdom will use the Sterling Overnight Index Average (SONIA) to replace the LIBOR rate.
This means repricing contracts is a highly complex and enormous task, even more so now that there will be more than one rate to consider.