LIBOR Transition

Preparing for Life After LIBOR

Currently the most widely used reference rate in the world, the London Interbank Offered Rate (LIBOR) will be phased out in the financial markets.

The Alternative Reference Rates Committee (ARRC), a working group convened by the Federal Reserve, was charged with identifying an alternative index to LIBOR and establishing a transition plan for the U.S. market. The ARRC has recommended the Secured Overnight Financing Rate (SOFR) as the replacement for LIBOR, and a paced, structured transition is underway.

We have prepared the following information to help ensure that our members are prepared for the transition and the possible changes in operations, financial management strategy or product offerings as a result of the phase out.

Resources and Information

Industry Sources

FHLB Des Moines News and Announcements

LIBOR FAQ's (Last updated July 1, 2021)

  • What is LIBOR?

    The London Interbank Offered Rate (LIBOR) is a widely used benchmark for short-term interest rates, providing an indication of the average rates at which LIBOR panel banks could obtain wholesale, unsecured funding for set periods in particular currencies.

    Used globally, LIBOR is often referenced in derivative, bond and loan documentation, and in a range of consumer lending instruments such as mortgages and student loans. It is also used as a gauge of market expectation regarding central bank interest rates, liquidity premiums in the money markets and, during periods of stress, as an indicator of the health of the banking system.

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  • Why is LIBOR going away?

    Although significant progress has been made in strengthening the governance and processes underlying LIBOR, the scarcity of underlying transactions poses a continuing risk of a permanent cessation of its production.

    Because U.S. dollar (USD) LIBOR is used in such a large volume and broad range of financial products and contracts, the risks surrounding it pose a potential threat to the safety and soundness of individual financial institutions and to financial stability.

    Without advanced preparation, a sudden cessation of such a heavily used reference rate would cause considerable disruptions to and uncertainties around the large gross flows of USD LIBOR–related payments and receipts between many firms. It would also impair the normal functioning of a variety of markets, including business and consumer lending.

    Read more here.

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  • What is SOFR?

    In 2017, the Alternative Reference Rates Committee (ARRC) selected the Secured Overnight Financing Rate (SOFR) as the rate that represents best practice for use in certain new USD derivatives and other financial contracts, representing the ARRC's preferred alternative to USD LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market.

    Click here for a primer on SOFR.

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  • What are the differences between LIBOR and SOFR?
  • What is the timeline to transition away from LIBOR?

    On March 5, 2021 the FCA announced that the LIBOR benchmark rates for 1-week and 2-month LIBOR will no longer be representative after December 31, 2021. All other tenors, including 1-month, 3-month, and 6-month LIBORs, will be no longer representative after June 30, 2023.

    Learn more about the full transition here.

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  • What should my institution be doing to prepare for this transition?

    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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  • How is FHLB Des Moines preparing for this transition?

    We completed a multi-year plan to prepare our own operations for the LIBOR phase-out and have taken steps to begin implementing that plan. Those steps have included participating in SOFR-indexed debt issuance and issuing SOFR-indexed advances to our members. 

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  • Does FHLB Des Moines offer SOFR advances?

    In anticipation of this transition over the next few years, FHLB Des Moines offers members the ability to participate in SOFR benchmarked advances. Contact your Relationship Manager to learn more about SOFR advance opportunities.

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