LIBOR to SOFR

Stay Abreast of LIBOR Developments with AFS

The mandate that banks transition from their current use of LIBOR to the new daily rate approach SOFR by the end of 2021 has caused some upheaval in the industry. There are a lot of questions surrounding preparedness, system compatibility, and how SOFR will be calculated. 

As an active member of the ARRC Business Loan Working Group concerning the upcoming LIBOR transition, AFS is in a unique position to provide the latest updates on transition activities. Here, we provide answers to the some frequently asked questions, offer resources, and provide the opportunity to sign up for the AFS LIBOR Update email list.

Frequently Asked Questions

When is LIBOR Going to end?
AFS is following guidance from the Alternative Reference Rates Committee (ARRC) that LIBOR will cease as of December 31, 2021. LIBOR might still be available, but not reliable. Why? Because some of the 16- to 20-bank panel will not be providing it to the Bank of England or the FCA. Meaning, the median they will be using to publish will be from a lesser group/number of banks. Therefore, some investors might easily think there could be potential for manipulation and reject the rate.

What Rate is replacing LIBOR?
The ARRC selected the Secured Overnight Financing Rate (SOFR) as the recommended benchmark interest rate to be used in place of USD LIBOR. SOFR is an overnight, secured rate based on actual transactions in the repo market. It is considered to be risk free because its underlying transactions used to calculate the rate are secured by U.S. Treasury securities. 

The following SOFR conventions are recommended: Forward-Looking Term SOFR, SOFR Rate Compounded in Advance, SOFR Compounding in Arrears, and Simple Daily SOFR in Arrears. AFS systems already support three of the four, with Compounding in Arrears delivery on scheduled for August/September 2020.

When will the SOFR rates be published?
On March 2, 2020, the Federal Reserve Bank of New York began publishing a compounded 30-Day, 90-Day and 180-Day Average SOFR. The SOFR Averages and Index

Data are available on the Federal Reserve Bank of New York’s  website at https://apps.newyorkfed.org/markets/autorates/sofr-avg-ind.

Additionally, daily SOFR in Arrears is available at https://apps.newyorkfed.org/markets/autorates/SOFR.

Are AFSVision and AFS Level III currently capable of supporting the transition?
As of December 2019, AFSVision and AFS Level III support three of the four SOFR methods (Compounded in Advance, Forward-Term SOFR, and Simple Daily SOFR in Arrears). Code delivery for Compounding in Arrears for AFS Level III is scheduled for August 31, 2020 and AFSVision delivery is scheduled for September 30, 2020.

When does AFS anticipate providing the LIBOR Transition Change (Requirements) Documentation?   
User documentation is supplied as part of the code delivery. Code and user guides for the first three SOFR calculation methods were delivered to all clients in December. Compounding in Arrears is scheduled to coincide with code delivery for both systems.

What does AFS perceive as its biggest challenge with the LIBOR Transition? 
Supporting the operationalizing of SOFR Compounding in Arrears Interest Convention; however, we are confident that we can do so.

Does AFS offer any custom LIBOR Transition support?   
Yes, please contact Dean Snyder at DSnyder@afsvision.com or your RM to review your requirements.

Is there a timeline for the transition?
AARC has published a Paced Transition Plan that includes specific steps and timelines designed to encourage adoption of SOFR. 

Life with SOFR: The Best Practices Leadership Council Presents the Following LIBOR Transition Update

Be Prepared 

Here are a few examples of questions/key areas to address as you prepare for the transition.

• Where is the Impact? – Identify your LIBOR positions (exposure) within all operation systems.
• Treasury Pricing – Define and clarify replacement rates that require adjustments.
• Documentation – Identify and review all documentation for loans maturing after December 31, 2021.
• Operational Readiness – Plan (testing) for the operation fallbacks to the new rate(s).

If you have any LIBOR transition questions or concerns, please contact Dean Snyder at DSnyder@afsvision.com.