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libor transition
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What is LIBOR?

What is LIBOR? 

The London Interbank Offered Rate or LIBOR is an interest rate average calculated from estimates submitted by leading banks in London where each bank approximates what it would be charged were it to borrow from other banks. LIBOR is unsecured and determined by private entities. In the United States, contracts have included LIBOR language for floating interest rates since 1986 in agreements such as business loans (commercial mortgages), retail loans (consumer loans and credit cards), and securitization (residential mortgage-backed securities RMBS) to name just a few.

Why is LIBOR going away?

A few bad actors in the early 2000s were caught committing fraud and manipulating the LIBOR rate for financial gain. Those people are now in prison and it has been decided that changes need to be made. It has been determined that an alternative rate needs to be found to replace the LIBOR rate found in numerous and different types of contracts.

In 2014, the Federal Reserve Bank in the United States formed the Alternative Reference Rate Committee or ARC that is made up of experts including participants from banking, asset management, insurers, and industry trade organizations. Their purpose is to find a risk-free and more robust alternative rate, based on actual rates charged, to replace LIBOR. Their goal in doing this is to eliminate market manipulation.

When is LIBOR Actually Ending?

U.S. LIBOR Tenors Expiring June 30, 2023:

  • Overnight U.S. LIBOR

  • 1-Month U.S. LIBOR

  • 3-Month U.S. LIBOR

  • 6-Month U.S. LIBOR, and

  • 1-Year U.S. LIBOR

U.S. LIBOR Tenors Expiring December 31, 2021:

  • 1-Week U.S. LIBOR, and

  • 2-Month U.S. LIBOR

What Types of Contracts Have LIBOR?

  • Business Loans ex: corporate business loans, commercial mortgages

  • Retail Loans ex: auto loans, student loans, consumer loans, credit cards, retail mortgages

  • Syndicated Loans

  • Floating Rate Notes

  • Securitization ex: residential mortgage-backed security (RMBS)

  • OTC Derivatives ex: interest rate swaps, interest rate options

  • Exchange-Traded Derivatives ex: interest rate options, interest rate futures

  • Deposits

How Can I Prepare My Many Contracts for This Change?

It is best to have all of your information in one place. Gathering all contracts into a contract repository is ideal for reporting and examining specific provision language. It also saves time and creates efficiency for the legal team. Contact LinkSquares today to learn more about how LinkSquares can help you navigate the LIBOR transition.

For more information, check out this article from Tim Parilla, LinkSquares Chief Legal Officer, The Legal Impact of Libor on Contracts and Business

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Eliana Lee is a Legal Engineer at LinkSquares.