Regions and the LIBOR Transition: What You Need to Know

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate index produced by large global banks. LIBOR represents what the participating banks would charge for borrowing from one another. Globally, LIBOR has been used as the primary benchmark for short-term rates (overnight, 1-week, 1-month, 2-month, 3-month, 6-month and 12-month). In March 2021, there were approximately $200 trillion in outstanding financial contracts tied to USD LIBOR.

Why is LIBOR being replaced?

Since the last financial crisis, there has been a significant reduction in the type of trading activity that supports LIBOR. Rate calculations have increasingly relied on expert judgment, leaving LIBOR at risk for possible manipulation.

Given this decline in market representation and reliability, LIBOR’s regulator, the Financial Conduct Authority, determined that the worldwide financial industry should move to more robust alternatives, which caused financial institutions across the globe to start preparing for the cessation of LIBOR.

What is the Alternative Reference Rates Committee?

In the United States, the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed, was tasked with ensuring a successful transition away from LIBOR.

Regions participates in ARRC working groups to so we can quickly evaluate any new developments.

When is LIBOR going away?

On March 5, 2021, the Financial Conduct Authority announced that overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR rates will no longer be available after June 30, 2023 for legacy contracts.

USD LIBOR is no longer available at Regions for new or renewed transactions.

What will happen to LIBOR loans after June 30, 2023?

Any loans that are still referencing LIBOR on June 30, 2023 will “fall back” to an alternative index at the beginning of the next interest period. This means impacted loans and derivatives will transition according to the fallback provisions of their contract, or according to the fallbacks outlined in the Adjustable Interest Rate (LIBOR) Act. The LIBOR Act was signed into law on March 15, 2022, to provide a federal solution for transitioning LIBOR contracts. Customers with LIBOR products that will fall back should receive a notification from Regions informing them of the index to which their loan(s) will fall back.

What index is replacing LIBOR?

The ARRC has recommended the Secured Overnight Financing Rate (SOFR) as the alternative for USD LIBOR. Overnight SOFR is based on transactions in the Treasury Repurchase Market, which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. Overnight SOFR Reference Rates are published by the Federal Reserve Bank of New York at 8:00 a.m. ET daily. Because SOFR is nearly risk-free and not a credit sensitive rate, a loan transitioning from LIBOR to SOFR should include a credit spread adjustment as described in the LIBOR Act. Find out more about SOFR from the New York Federal Reserve.

What is Term SOFR?

Term SOFR Reference Rates are calculated and published by the CME Group at 6:00 a.m. ET daily for 1-month, 3-month, 6-month and 12-month tenors. Term SOFR provides an indicative, forward-looking measurement of Overnight SOFR based on market expectations implied from leading derivatives markets. It is derived by compounding the Overnight SOFR rates using the 1-month (SR1) and 3-month (SR3) futures contracts. Term SOFR was endorsed by the ARRC on July 29, 2021 and, like Overnight SOFR, is a risk-free rate that should include a credit spread adjustment for loans transitioning from LIBOR. Find out more about Term SOFR from the CME Group.

Where else can I find information about the LIBOR Transition?

Regions launched a podcast series explaining the foundations of the LIBOR transition and what you need to know to navigate the transition.

Listen to the LIBOR podcast episodes.

If you have any other questions about the transition, please contact your Regions banker.