LIBOR Transition: What You Need to Know

Replacing the world’s most widely used interest rate benchmark

The UK’s Financial Conduct Authority (FCA) has made it clear that the publication of LIBOR, the London Interbank Offered Rate, is not guaranteed beyond 2021. LIBOR, a benchmark interest rate at which major global banks lend to one another in the interbank market, is underpinning over $200 trillion[1] USD of financial contracts. With the approaching end to LIBOR as an interest rate index, financial institutions and individuals or entities with loans that could be impacted need to understand what this change means in order to limit disruption and mitigate risk.
 

November 2020 Update

On November 30, 2020, the Federal Reserve Board announced support of a proposal by ICE, the benchmark administrator for LIBOR, that, if adopted, would extend the anticipated end date for most tenors of USD LIBOR to June 30, 2023, from the previously announced December 31, 2021, enabling more legacy contracts to mature before LIBOR ceases. Regulators also encouraged banks to stop entering into new USD LIBOR contracts as soon as practicable (as early as the end of June, 2021) and not later than December 31, 2021. Further, regulators directed banks that any new lending or derivative contracts entered into during 2021 should utilize an alternative index rate or include fallback language that clearly defines an alternative index rate following the discontinuing of LIBOR. Although the ICE announcement has received support from both US and UK regulators, it remains a proposal and has not yet been formally adopted.

What is LIBOR?

LIBOR has been used globally as a benchmark to gauge funding costs and investment returns for financial contracts for more than 3 decades. It is used to help set the interest rates on many loans, swaps, bonds, credit cards, adjustable rate mortgages, and other products offered by financial institutions.

 

Why is LIBOR being phased out?

Changing industry norms and LIBOR manipulation scandals are driving a shift away from LIBOR, causing interbank lending markets to become much thinner and the number of actual transactions upon which the rate is based to decrease significantly. That has caused regulators globally to actively advocate that markets move away from LIBOR to a more reliable index.

 

How is PNC preparing for the LIBOR transition?

PNC has a large team dedicated to this transition that is active in many industry working groups and closely engaged with market activities. No action is required of clients at this time. PNC will provide further updates and new documents or amendments to existing documents to facilitate the transition as replacement reference rates are identified and implemented in the financial industry generally.

 

Frequently Asked Questions

LIBOR Transition Resources

Alternative Reference Rate Committee

ARRC is group of private-market participants convened by the Federal Reserve Board and the New York Fed.

Visit ARRC »

 

ARRC SOFR Transition
Overview

In 2017, the ARRC selected SOFR as the rate that represents best practice for use in certain new USD derivatives and other financial contracts.

Learn More »

 

ARRC
SOFR User
Guide

This note is intended to help explain how market participants can use SOFR in cash products.

View Guide »

 

International Swaps and Derivatives Association

ISDA is comprised of a broad range of derivatives market participants.

Visit ISDA Transition from LIBOR »

 

Federal Reserve Bank of
New York

Working within the Federal Reserve System, the New York Fed implements monetary policy, supervises and regulates financial institutions and helps maintain the nation's payment system.

Visit New York Fed»
 

Important Legal Disclosures and Information

1. https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report

The information contained in this site is of a general nature and does not constitute the provision by PNC of investment, legal, tax, or accounting advice. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy.

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