At some point this year, the Intercontinental Exchange will completely phase out LIBOR. This sun-setting will have a direct impact on how many do business.
This post will answer all your questions about LIBOR; explain what it is, why it is being phased out, and what impact that could have on your business.
What is LIBOR?
LIBOR stands for London Interbank Offered Rate. This benchmark index serves as a globally accepted benchmark interest rate that drives borrowing costs between banks. LIBOR is associated with five currencies: the US dollar, the Euro, the British pound, the Japanese yen, and the Swiss franc. When a person refers to the current LIBOR rate, they mean the three-month US dollar rate.
Every day the Intercontinental Exchange asks global banks how much they would charge others for short-term loans. This daily rate impacts many international banking transactions. LIBOR also directly impacts consumers as it is the basis for consumer loans, specifically on agreements with interest rates. Consumers can expect all agreements involving their credit cards, car loans, and adjustable-rate mortgages to be affected.
When is LIBOR being phased out?
The Financial Conduct Authority of the United Kingdom has announced its plans to phase out LIBOR by the end of the year. There has been no announcement yet as to what will replace it. Meanwhile, the US will replace LIBOR with the Secured Overnight Financing Rate (SOFR), a risk-free rate based on the cost of borrowing secured by US Treasuries.
What can I expect with SOFR?
SOFR is a much more transparent rate and benefits from more protections against market manipulation than LIBOR. Daily SOFR volumes generally remain between $700 billion and $800 billion and regularly exceed $1 trillion.
What impact will the end of LIBOR have on my business?
Your company will need to identify all its active contracts that refer to LIBOR and negotiate them to meet the new SOFR. Early estimates predict this will impact over $350 trillion in international contracts. And the US Securities and Exchange Commission’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant have issued statements that companies need to be urgently moving on these renegotiated agreements. Not acting quick enough can cause contractual agreements to become void.
How does my company move quickly on contracts affected by the end of LIBOR?
Smart business owners know they need to get out ahead of this issue. Here are some steps your organization should take to mitigate any potential negative consequences that can occur.
Your team will need to go through all contracts to identify those impacted by this phase-out quickly.
- Identify potential negative consequences
Your team will need to identify how the change from LIBOR to SOFR will affect the agreements you have in place, including your company’s products, data, and even disclosure obligations.
- Make all team members aware
Your company needs to ensure that every team within the organization understands its role in the contract renegotiations.
- Inform clients and contractors
All parties affected by the contract changes need to be informed ASAP. Let them know what is going on, and that contract renegotiation will be underway soon. This move alerts them that you are proactively handling a delicate situation on their behalf.
Let Zendoc help
With time being of the essence, your organization must act quickly on these affected contracts. Step 1 of taking inventory will, no doubt, be the most time-consuming of this ordeal. That’s where Zendoc comes in.
Our AI-powered contract automation platform can instantly locate your contracts with clauses that have LIBOR attached. Your team will now have the agreements they need and be able to start renovations immediately.
Zendoc’s ongoing contract analysis uses a powerful and efficient search algorithm for tasks precisely like this one. It only takes one minute to sign up to save your team hours of their time. You’ll instantly have all your contracts at your fingertips. Let us help you be prepared for the end of LIBOR before it’s too late.