You may hear about changes to benchmark reference rates, such as the London Interbank Offered Rate (LIBOR), prior to December 2021. Reference rates are utilized broadly in the construction of many financial products, including loans, floating rate notes, derivatives and securitizations. As benchmark reform is implemented over the next couple of years, Bank of America is working with global regulators, industry working groups and trade associations on a transition strategy from current benchmarks to alternative reference rates.
In July 2017, the Financial Conduct Authority (FCA), a regulatory body in the United Kingdom, announced that it will no longer require banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021.
On November 30, 2020 ICE Benchmark Administration Limited (IBA), the administrator of LIBOR, announced it will consult on its intention to cease the publication of one week and two month USD LIBOR settings at end-December 2021, and the remaining USD LIBOR settings (overnight, one month, three month, six month, 12 month) at the end of June 2023. The consultation is expected to commence in December 2020 and close at the end of January 2021. Other LIBORs (GBP, EUR, CHF, and JPY) are still expected to be discontinued after December 31, 2021.
Given these announcements, Bank of America continues its enterprise-wide initiative to identify, assess and monitor risks associated with the potential discontinuation or unavailability of benchmarks, including LIBOR, and the transition to alternative reference rates. We are also evaluating existing contracts across all products to determine the impact of a discontinuation of LIBOR or other benchmarks and to address potential changes to those contracts.
Bank of America is actively working with global regulators, industry working groups and trade associations to develop strategies for an effective transition to new benchmarks. For example, Bank of America launched capabilities to support issuance and trading in products indexed to the new Secured Overnight Financing Rate (SOFR), which is the alternative benchmark rate to U.S. dollar LIBOR recommended by the Alternative Reference Rates Committee (ARRC). The ARRC is a group of private-market participants and official-sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York. SOFR is a broad measure of the cost of borrowing U.S. dollars overnight collateralized by U.S. Treasury securities.
We will work closely with our clients on the transition, taking into consideration client concerns. For further guidance on how to prepare for the possibility that LIBOR or other benchmark rates will be discontinued or materially change, please consult with your legal, tax, financial and other professional advisors.
LIBOR Transition Overview
What is LIBOR?
For many years, the London Interbank Offered Rate (LIBOR) has been one of the most widely used interest rate benchmarks in the world.
Launched in 1969, LIBOR was first used in the syndicated loan market as a way to spread the risk of a loan across multiple lenders, using a periodic reset in the rate based on the banks’ funding costs plus a spread for credit risk. Over the last 50 years, LIBOR has become the most widely used interest-rate benchmark in the world. As of April 2019, approximately $370TN of financial contracts referenced LIBOR-based rates across various currencies globally, including USD, EUR, GBP and JPY. The bulk of these are OTC derivatives, but LIBOR is referenced across a broad range of financial products that includes loans, adjustable rate mortgages (ARMs), securitizations and floating rate notes (FRNs).
The ICE Benchmark Administration (IBA), as the benchmark administrator for LIBOR, calculates and publishes daily LIBOR rates for five currencies (CHF, EUR, GBP, JPY and USD) and seven tenors. These rates are intended to indicate the average rates at which banks could obtain wholesale, unsecured funding and are calculated based on contributions from panels of banks, one panel for each currency. For USD LIBOR, the panel of banks includes Bank of America, N.A.’s London branch, among other major banks.
Why is LIBOR being discontinued?
Since the 2008 financial crisis, the robustness of LIBOR as a benchmark of banks funding costs has been called into question, leading to the creation of alternative reference rates (ARRs) in several of the major currencies to enable a transition away from LIBOR. The UK’s Financial Conduct Authority (FCA), which has supervisory oversight over the administration of LIBOR, announced in July 2017 that it will no longer compel LIBOR panel banks to submit rates for LIBOR after 2021. Then on November 30, 2020 ICE Benchmark Administration Limited (IBA), the administrator of LIBOR, announced it will consult on its intention to cease the publication of one week and two month USD LIBOR settings at end-December 2021, and the remaining USD LIBOR settings (overnight, one month, three month, six month, 12 month) at the end of June 2023. The consultation is expected to commence in December 2020 and close at the end of January 2021. Other LIBORs (GBP, EUR, CHF, and JPY) are still expected to be discontinued after December 31, 2021. These announcements require market participants to consider the future of LIBOR and certain other rates or indices, which are used as interest rate benchmarks.
What is LIBOR transitioning to?
The following chart provides ARRs or risk-free rates (RFRs) that various working groups have identified and recommended across five major jurisdictions as alternatives to LIBOR.
At present, LIBOR and ARRs are not equivalent rates, as they utilize different underlying transactions and methodologies in their construction.
What is the Transition Timeline?
How does the transition impact our clients?
For financial products referencing LIBOR, the impact could vary across different types of products, and even between transactions in the same type of product. Additionally, some LIBOR currencies and tenors may be discontinued on differing schedules. For instance, based on the IBA’s November 30, 2020 announcement, it is possible that some USD LIBOR tenors (overnight, one month, three month, six month, 12 month) may discontinue at the end of June 2023, while other LIBORs are expected to discontinue at the end of 2021.
It is important that clients review and understand the governing terms of their financial products. Clients should prepare for the possibility that LIBOR and other benchmark rates may be discontinued or materially change.
Some financial products that may be impacted by benchmark reform include:
- OTC Derivatives
- Exchange-Traded Derivatives
- Floating Rate Notes (FRNs)
This list is indicative and not fully exhaustive. Other financial products may also be affected indirectly due to changes in discounting curves or pricing.
For guidance on how to prepare for the possibility that LIBOR or other benchmark rates will be discontinued or materially change, please consult with your legal, tax, financial and other professional advisors.
How is Bank of America assisting its clients?
Bank of America is working closely with our clients to promote awareness of these changes, take into consideration client concerns, support markets, and provide solutions to our clients. Bank of America is participating in the work of global regulators, industry working groups and trade associations aimed at supporting a smooth transition away from current benchmarks to ARRs or other replacement rate(s).
More information can be found in Bank of America’s most recent Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission. Additional information on the potential impact of the transition to ARRs on your investments and transactions can be found in Bank of America’s IBOR Transition Statement. Below are additional resources on benchmark reform and the IBOR transition:
Central Banks & Working Groups:
The above resource links are not affiliated with Bank of America or any of its affiliates and are provided for information and educational purposes only. Any opinions and/or views expressed do not necessarily reflect the opinions and/or views of Bank of America or any of its affiliates.
- Prior to December 2021, benchmark reference rates –such as the London Interbank Offered Rate (LIBOR) –are expected to change
- Bank of America is working closely with global regulators and industry partners on a transition strategy
- We will also work with clients on the transition, taking into account client concerns
- More information can be found in Bank of America’s most recent Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission