Libor Transition

The financial services industry is preparing for the expected phase out of the London Interbank Offered Rate (LIBOR) at the end of 2021. LIBOR is the most widely used interest rate benchmark in the world, estimated to be referenced in $200 trillion worth of financial contracts. LIBOR is based on daily submissions of estimated borrowing rates by a panel of banks.

In 2017, the Financial Conduct Authority (FCA), which regulates LIBOR, announced it would no longer guarantee LIBOR production beyond 2021, resulting in the phase-out of LIBOR as a benchmark interest rate.

As part of this transition, the Federal Housing Finance Agency (FHFA), which regulates the FHLBanks, issued a supervisory letter to all Federal Home Loan Banks instructing them that, as of Dec. 31, 2019, they should stop purchasing investments in assets tied to LIBOR with contractual maturity beyond Dec. 31, 2021. The FHFA has required that by March 31, 2020, the FHLBanks should no longer enter into all other LIBOR-based transactions involving advances, debt, derivatives, or other products with maturities beyond December 31, 2021, with only very limited exceptions granted by FHFA.

The Federal Reserve tasked the Alternative Reference Rate Committee (ARRC), a group of market participants, with developing a rate to replace LIBOR and ensuring a successful transition. In 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) to be the recommended successor rate to USD LIBOR.

Since SOFR was identified to replace LIBOR in the United States, a paced transition plan has been underway and led by the ARRC. As LIBOR is wide-spread throughout the financial markets, the FHLBanks recognize that a smooth transition will be crucial to the stability of the financial markets, the operations of each regional FHLBank, and the operations of shareholders. Therefore, the FHLBanks are active participants in industry working groups that are setting the standards and timelines for the transition including the ARRC and the International Swaps and Derivatives Association (ISDA) – the two primary bodies overseeing the transition for cash products and derivatives.

The FHLBanks also have developed multi-year plans to reduce their LIBOR exposures over time, and they provide regular updates and resources to members as they become available.

Since SOFR was identified to replace LIBOR in the United States, a paced transition plan has been underway and led by the ARRC.

Transition initiatives in the U.S. are led by the Alternative Reference Rates Committee ARRC. The ARRC was formed in November 2014 by the Board of Governors and Federal Bank of New York.

The FHLBanks have developed multi-year plans to reduce their LIBOR exposures over time, and each Bank provides regular updates and resources to members as they become available.