An Effective Approach to Navigate the LIBOR Transition


  • Justin Wellen and Zac Ross
  • Published: 07 September 2021

Moving away from the London Interbank Offered Rate, the LIBOR transition is more than just a “flip-the-switch” exercise and requires careful planning and execution. While considerable progress has been made, there remains much to do, as many banks develop plans to execute on their program playbooks. Still, more needs to be done, and as indicated in several recent announcements, there is a renewed urgency to complete transition activities in a timely manner. Without proper discipline and planning, financial institutions are open to risk and potential litigation. It’s important to ensure your organization is well-prepared to meet the heightened demands of the LIBOR transition and navigate the challenges.

Navigating the LIBOR Transition: Why Still Relevant?

As we reach the second half of 2021, the Fed and other regulating bodies (e.g. FSOC) have increased pressure on financial institutions to complete the transition away from LIBOR to alternative rates. In March, the Fed advised that its examiners are encouraged to consider taking supervisory action if a financial institution is not ready to cease issuance of new LIBOR-based contracts by the
end of 2021. Then, in June, the Financial Stability Oversight Council (FSOC) issued a warning that financial institutions are not moving swiftly enough to replace the LIBOR benchmark. The LIBOR cessation date has been extended to June 30, 2023, but regulators want to ensure financial institutions are putting plans in place and moving forward – delaying the cessation date is not an opportunity to rest.

The Fed’s advisement and the FSOC’s criticism should put all financial institutions on alert, no matter where they are in the LIBOR transition process. To satisfy regulators, LIBOR transition plans must adequately cover changes to people, process, and technology. A thorough LIBOR transition plan will contain detailed roadmaps outlining the transition from current state to future state. The internal communication and training program would educate employees and contractors on a clear, concise message to promote internal consistency, thus minimizing customer confusion. All systems affected by the LIBOR transition should be analyzed and updated as needed. Effective execution of the LIBOR transition will require program coordination across workstreams and geographies. With the heightened regulatory scrutiny, it’s essential to prioritize LIBOR transition planning to get out in front of the regulators and avoid any potential issues before they arise.

To further complicate the LIBOR transition process, the assumption that the market would universally adopt an alternative rate to LIBOR was mistaken. As the industry transitions away from LIBOR, there has been a surge in alternative rates in several different asset classes. ARRC supports the use of the SOFR Term Rate and other SOFR-based rates for business loan activities and the GSEs have been offering SOFR-based products since the third quarter of 2020, but SOFR has its limitations opening the door for other alternative rates. While SOFR is becoming the preferred alternative for certain products, the cessation of LIBOR has created an opportunity for other market data providers, exchanges, and clearing houses to enter the market for rates – like Bloomberg Short-Term Bank Yield (BSBY), ICE Bank Yield Index (BYI), and AMERIBOR – that bring to the table not only a term structure but an underlying credit sensitivity that is clearly lacking from SOFR.

LIBOR Transition Action Plans

The maturity of the LIBOR transition varies among financial institutions; however, across the industry there is still a lot of work to be done. Legacy LIBOR contracts continue to provide challenges regarding exposure, repapering, and communication. A plan for change implementation must be carefully crafted to guide the financial institution, its employees, and its customers through the transition away from LIBOR. These steps include:

  • Analyzing people, process, and technology workflows to identify, strategize, and implement necessary changes
  • Assisting with the development and implementation of change management strategies, including training and communication – both internally and externally
  • Providing quality assurance to prepare for inquiries from regulators
  • Developing strategies to identify and mitigate risks
  • Assisting with the development and implementation of new products based on SOFR and other alternative rates

Once the LIBOR transition has been activated, there need to be systems in place to monitor the transition. Systems which can identify issues and provide solutions to minimize potential business disruption.

A key element of any large-scale transition is clear, concise communication – with the relevant parties both inside and outside of the organization. To avoid confusion, the various teams throughout the organization that will be affected by the LIBOR transition should be identified so channels may be created for two-way communication to address employee questions or concerns. Internal training should be developed to ensure widespread understanding of the changes being implemented and their effects. Coordination between investors, vendors, and other external stakeholders will be required to ensure consistent messaging. Lastly, with the new emphasis on enforcement coupled with the increased attention on the LIBOR transition, organizations must make certain they formally document their plans and strategies and are prepared for open dialogue with regulators.

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