LIBOR Updates

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?
Financial Conduct Authority (FCA) sought voluntary agreements with the panel banks to continue their submissions through the end of 2021. Beyond 2021, LIBOR may still be published for some time, but the production of LIBOR is not guaranteed.

What Rate is replacing LIBOR?
The Alternative Reference Rates Committee (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. 

Is AFSVision currently capable of supporting the transition?
Based on current definitions, AFSVision already supports most of the SOFR requirements in the current release. SOFR processing is fully real-time and supported through AFSVision’s unique new multi-balance processing, allowing for multiple pricing tranches on a single loan with full support for multicurrency at all deal levels. Interest and fee accounting has been enhanced for more GL flexibility and full data is included in daily extracts for financial and ad hoc reporting.
AFSVision, Release 3.2 (targeted for 4Q19), will fully support SOFR, including the lockout period, rate lookbacks and compounding in arrears requirements.

What about AFS Level III?
The current product configurations of AFS Level III also support most of the SOFR requirements. Based on the expected final definitions and final consensus on the timing of the requirements, AFS plans to be prepared to deliver additional code updates in 1Q20 as a patch to clients’ current versions of AFS Level III. A release upgrade with not be required. 

When does AFS anticipate providing the LIBOR Transition Change (Requirements) Documentation?   
This was originally planned for the end of 1Q20; unfortunately, because final ARRC recommendations may not be out until January 22, 2020 this date may been pushed out. However, we will be providing User Guides the first week in December 2019 for currently supported SOFR methods. 

When does AFS anticipate providing the LIBOR Transition System Updates?   
This was originally planned for the end of 1Q202; however, delays in receiving the final requirements from the ARRC will most likely push this date.

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. They have also published a set of 2019 Incremental Objectives as a complement to the Transition Plan to aid in transition planning.

What are the four SOFR rate conventions under discussion?
They are the Forward-Looking Term SOFR, SOFR Rate Compounded in Advance, SOFR Compounded in Arrears, and Simple Daily SOFR in Arrears.
Discussions concerning a phased approach to these four conventions is scheduled for the October 22, 2019 meeting.

When will the SOFR rates be published?
The AARC BLWG is still examining all rate methods using AFS-designed use cases; however, Forward-Looking Term rates are targeted for the first half of 2020.
The AARC is targeting January 2020 for all final recommendations.

Will there be an available SOFR Forward Term Market similar to current LIBOR? 
Yes, although the ARRC is still reviewing the feasibility.

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.

Resources
AFS Blog: Stay on Track for the LIBOR Transition
AFS Best Practices Leaders Council Webinars 
ARRC LIBOR Transition Page
LSTA website