The Federal Home Loan Bank (FHLBank) System suggests starting with the framework below to begin your transition planning:
Create a team to oversee the transition
Convene a structured team led by a senior executive and comprising representatives from treasury, loan operations, accounting, legal, information technology, risk management, communications, and others as needed to develop a transition plan, oversee its execution, and report regularly to the board of directors.
Inventory existing LIBOR transactions
Quantify all financial exposure to LIBOR and estimate the impact that a LIBOR phase out may have on hedge effectiveness, interest-rate risk, basis risk, and valuations.
Evaluate existing fallback provisions in legacy transactions
Review legacy LIBOR contracts that extend beyond 2021 to determine if current fallback language is adequate to provide a smooth transition to another reference rate. A primary consideration will be the calculation of interest in adjustable-rate instruments in the absence of LIBOR. Amend contract language for those agreements as needed, in compliance with banking, securities, and consumer protection laws. In addition, determine if changes to contracts require consent of various parties named in the agreements.
Develop language for LIBOR transactions going forward
In addition to addressing fallback language in legacy contracts, develop fallback language for new transactions going forward, providing for a smooth transition to a new reference rate. Again, prepare this language for compliance with banking, securities, and consumer protection laws.
Review accounting, tax, and systems implications
Assess changes to systems, models, and other operational processes that will be triggered by the LIBOR phase out. Accounting systems, loan systems, pricing models, risk models, and other management information systems will likely require changes.
Mitigate risk of disputes and create mechanisms for handling disputes
When amending contract language or developing language for new transactions, keep an eye on mitigating risks of disputes with borrowers or other parties to the financial contract. Create procedures and mechanisms to handle any disputes that may arise.
Develop a communications plan
Determine how to communicate changes to customers and other relevant parties.
Stay informed of industry developments and best practices
Create processes to stay up to date on developments in the industry on the LIBOR phase out and transition to SOFR, and take advantage of industry best practices around contract language and operational processes as they become available.
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