In the US, the transition from the LIBOR floating interest rate structure has been bumpy thus far, and there are still many uncertainties of what will happen when LIBOR is no longer used in any manner for either new or existing contracts.
For legal teams looking to get up to speed about the legal impact of LIBOR on contracts and business, we’ve created a free educational download that addresses some of the most common questions. Here’s a sneak peek.
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 US, contracts have included LIBOR language for floating interest rates in agreements since 1986, including 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 US Federal Reserve Bank formed the Alternative Reference Rate Committee (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 to replace LIBOR based on actual rates charged. Their goal in doing this is to eliminate market manipulation.
To learn more about LIBOR and what will happen when LIBOR is no longer used in any manner for either new or existing contracts, download the free LIBOR overview for legal teams. You’ll learn the types of contracts that have LIBOR, what the latest LIBOR transition updates are, and insights on the legal impact of LIBOR on contracts and business.