LIBOR Transition: What It Means For You
The global financial industry is preparing to transition away from a key benchmark interest rate — the London Interbank Offered Rate, or LIBOR — to new alternative rates. The UK’s Financial Conduct Authority (FCA) has made it clear that the publication of LIBOR will cease and regulators have called for a market-wide transition away from new LIBOR exposures by the end of 2021. Further, on March 5th, 2021, the FCA and the Ice Benchmark Administration confirmed the dates for ceasing the publication of each LIBOR tenor on a representative basis. While publication of the 1-week and 2-month USD LIBOR settings will cease on December 21, 2021, publication of all remaining USD LIBOR settings (i.e., overnight, 1-month, 3-month, 6-month, and 12-month tenors) will cease on June 30th, 2023.
If you have a commercial loan, your transaction may be tied to LIBOR as a benchmark. As the end to LIBOR as an interest rate index approaches, and the industry shifts to alternative reference rates, we are here to help you understand the new rates and how these changes may impact your transactions in the future. This global transition is an evolving process — as plans are being finalized across the industry, many details are still unknown, and we may not always have all of the answers. However, we will continue to follow developments, take necessary measures, and provide critical information to limit disruption, mitigation risk and support a smooth transition for our customers.
Transition Overview
Interest rate benchmarks (or reference rates) are regularly updated interest rates that are publicly accessible and used to set other interest rates for all kinds of financial contracts.
The London Interbank Offering Rate (LIBOR) – the leading benchmark rate at which major global banks lend to each other – underlies hundreds of trillions of dollars in financial instruments including derivatives, business loans, floating rate notes and adjustable rate mortgages.
The UK’s Financial Conduct Authority (FCA), who is responsible for regulating LIBOR, announced in July 2017 that it would no longer compel the panel of banks that submit cost of funds quotes to support the calculation of LIBOR to do so beyond 2021.
The FCA and the ICE Benchmark Administration (IBA), LIBOR’s administrator, later proposed the extension of certain USD LIBOR tenors until 2023 to allow markets sufficient time to transition its LIBOR exposures to alternative reference rates.
On March 5th, 2021, the FCA and IBA confirmed the dates for ceasing the publication of each LIBOR tenor on a representative basis:
- December 31st, 2021 for all Sterling, Euro, Swiss franc, and Japanese yen LIBOR settings; as well as the 1-week and 2-month USD LIBOR settings
- June 30th, 2023 for every remaining USD LIBOR setting (i.e., overnight, 1-month, 3-month, 6-month, and 12-month tenors)
Alternative Reference Rates and the Secured Overnight Financing Rate (SOFR)
In 2014, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) with the objective of identifying an alternative to USD LIBOR that was robust, IOSCO-compliant, transaction-based, and derived from a deep and liquid market. In 2017, the ARRC accomplished this goal by recommending the Secured Overnight Financing Rate (SOFR).
SOFR is based on overnight transactions in the U.S. dollar Treasury repo market – the largest rates market for a given maturity globally. National working groups like the ARRC were formed in other jurisdictions and have similarly identified other overnight nearly risk-free rates (RFRs) like SOFR as their preferred alternatives.
BankUnited is following the market standard and has selected SOFR as its replacement for any LIBOR exposures, but will continue to monitor the latest industry updates and will adjust its alternative reference rate strategy and offerings accordingly if there are any developments.
What is BankUnited Doing?
This transition is essential to a more sound and resilient financial system and requires a significant, coordinated effort from market participants.
BankUnited has established a LIBOR Transition Program and team consisting of subject-matter experts from across the bank to coordinate transition efforts across the enterprise. This team has been developing specific, actionable transition plans for each business line and driving the operational and system enhancements required to offer flexible, SOFR-based products and solutions that can be tailored to our clients’ needs.
Our team has been closely following the latest industry developments and participating in industry working groups to ensure BankUnited is at the forefront of the transition and well positioned to provide a smooth transition for all our customers. You can count on BankUnited to engage with you throughout this transition timeline to find the best solution for you.
We encourage you to contact your Relationship Manager and explore these FAQs for more information on how this transition may impact you.
The information and any materials accompanying this information (collectively, the “Materials”) on this Website are for general information only and are not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter. The Materials are not intended as an offer or solicitation for the purchase of BankUnited stock or any financial instrument.
This document is an indicative summary of our preliminary analyses of the upcoming LIBOR transition and the analyses and information expressed herein are based on certain assumptions that are subject to change. Although we believe that information contained in the Materials is reliable, it is not warranted as to completeness, timeliness or accuracy. The Materials are subject to revision and updates from time to time without notice, and we accept no responsibility for its use or to update or keep it current.
The information and opinions in these Materials, whether or not they were obtained or developed from outside sources, may not be appropriate for, or applicable to, some or any of your activities or circumstances. This information is not intended to override, and should be considered in conjunction with, any disclosures, or other statements identifying potential risks provided to you by BankUnited. The events described in these Materials could have unpredictable and material consequences for transactions, products, and services that require payments or calculations to be made by reference to LIBOR. BankUnited cannot provide any assurances as to the consequences, or likely costs or expenses associated with any of the changes arising from the LIBOR transition, though they may be important to you. The above is provided for informational purposes only and is not intended to apply to any specific customer or transaction.