Are You Ready for the Transition to SOFR?
The introduction of new products and the transition of legacy products from LIBOR to SOFR is an enormous task that impacts all areas of a financial services institution.
Because financial institutions are experiencing challenges with transitioning legacy contracts and introducing new SOFR products, the ICE Benchmark Administration (IBA) is changed their recommendation regarding the cessation date of the LIBOR Index from the end of 2021 to June 2023 for certain LIBOR tenors. Prior to the recent announcement from the ICE Benchmark Administration (IBA) the publication of LIBOR rates was to cease on December 31, 2021. Per a Senior Federal official “Waiting until June 2023 to end many key LIBOR tenors should allow for the majority of contracts tied to dollar LIBOR to expire naturally and avoid having to shift them to a new benchmark.”
This announcement does not change the requirement that no new LIBOR-based contracts may be initiated after 2021, however it does change the LIBOR cessation date for certain LIBOR tenors. Despite this recommendation by IBA, it is vital that financial services organizations do not pause their efforts to introduce new SOFR based products or cease their plans to convert their legacy LIBOR based contracts.
Your transition from LIBOR to SOFR based indexes initiatives should be on the home stretch. The Alternative Reference Rates Committee (ARRC) announced on July 29, 2021 that it is formally recommending (SOFR) Term Rates, following the completion of a key change in interdealer trading conventions on July 26, 2021 under the SOFR First initiative. The ARRC’s formal recommendation of SOFR Term Rates is a major milestone in the transition away from U.S. dollar (USD) LIBOR.
As of August 2021, there are only five months until no new LIBOR contracts can be issued. The complete cessation of LIBOR indexes for legacy contracts is still expected to be June 2023. For ARRC best practice recommendations related to the use of the SOFR Term Rate, please read the ARRC Scope of Use.
SOFR Readiness Checklist:
Financial Institutions need to prepare strategies for product pricing, funding and risk management. We have prepared this high-level checklist of areas that need to be assessed as you are planning your SOFR transition plans.
Need Experienced Support?
At Clarendon Partners, we have extensive experience working on transformation initiatives such as assisting operations with switching from LIBOR to SOFR for our financial services clients. Our expertise includes risk management, model governance, disaster recovery planning and transformation of processes, systems and people.