RMA LIBOR Transition Guide

For more information on the transition to alternative reference rates, visit RMA's Ibor Transition Resource Library.

It is expected that at year-end 2021, the London Interbank Offered Rate (LIBOR) will cease to function as the benchmark reference rate for an estimated $200 trillion in U.S. dollar exposures and $370 trillion globally. It is difficult to overstate the influence of LIBOR, as it impacts every corner of the financial system—from sophisticated securities trades to consumer loans that fund the purchase of homes, cars, and education. Given LIBOR’s ubiquitous reach, it is the view of RMA that financial institutions need to begin preparing for this transition immediately.

LIBOR is being phased out because less and less of the activity it is based on—unsecured loans from one bank to another—is occurring. The rate is now largely based on the estimates of 20 panel banks as to what they would pay if such transactions occurred, rather than actual borrowing. This being the case, the market has been losing confidence in the reference rate, and the indefinite continuation of the LIBOR has been deemed unsustainable by the organization that oversees it, the U.K.’s Financial Conduct Authority (FCA). FCA Chief Executive Andrew Bailey has announced that the FCA will not ask banks to provide data for the LIBOR after 2021.

The LIBOR phase-out has prompted global efforts to replace it with alternative reference rates. In the United States, the Alternative Reference Rates Committee, created by the Federal Reserve, has put forth the Secured Overnight Financing Rate (SOFR). The SOFR, which is based on triparty repo data from Bank of New York Mellon, cleared bilateral repo transactions, and general collateral finance repo data from the Depository Trust & Clearing Corporation, is considered a more reliable benchmark. In addition to being based on close to $1 trillion in daily activity, versus LIBOR’s $500 million, it complies with the Principles for Financial Benchmarks published by the International Organization of Securities Commissions.

While the SOFR will ultimately provide more assurance than LIBOR, in the short term financial institutions must plan to mitigate the issues caused by the transition. To manage the LIBOR transition successfully, financial institutions must take an informed, diligent, and enterprise-wide approach.

Commit to the LIBOR Transition

Hoping for a development that preserves LIBOR indefinitely is not viable. Accept that the transition is occurring, and commit to the numerous adjustments that will be required.

  • Install a LIBOR transition leader, team, or office to guide your efforts and keep them on plan until the LIBOR phase-out is complete and SOFR has been implemented completely in all of its tenors. 
  • Be sure that personnel from audit and risk management are on the team from the start, both because they can help assess progress and because their programs will be impacted by the transition. 
  • Make sure that there is buy-in up and down the organization, as that will be necessary to meet challenges that truly span the enterprise. 
  • Have a strategy that makes clear whether you will be an early or late utilizer of the SOFR. Regardless of the path you take, have a target date for when you will have all current products tied to a new alternative reference rate. 
  • Committing to the effort includes budgeting for the additional legal, information technology, risk management, compliance, tax, and accounting efforts that will be required to move to the SOFR.

Take Inventory

Determine your total exposure to the LIBOR phase-out by identifying all the LIBOR-linked loans and instruments to which your institution is a counterparty.

  • Note which lines of business are affected and how that exposure affects resources and your overall risk profile.
  • Know where all LIBOR-related contracts are stored and whether they have been digitized. 
  • Determine whether your institution, as constituted, has the necessary technology, data, and personnel to ensure for a smooth transition from LIBOR.
  • If your data and or technology assets are substandard, this may be an opportunity to improve data integrity firm-wide. In fact, a well-synchronized effort along these lines may help to flag all LIBOR references in the organization’s contract records, aiding greatly in the inventory process. Be cognizant of gaps in necessary data that may have been inherited through acquisitions, and plan to rectify them.
  • Inventory-taking must also include the impact of the LIBOR phase-out on various models. Determine how replacing or revamping several LIBOR-related models will impact the organization’s model risk management and model development resources.
  • Examine the likely impact on liquidity, pricing committee activities, the Comprehensive Capital Analysis and Review (CCAR), the new Current Expected Credit Loss (CECL) standard for the Allowance for Loan and Lease Losses, and the overall balance sheet.
  • Investigate your third parties to determine to what extent their activities add to your LIBOR exposures.

Change What You Can Now

Although the end of LIBOR is still over two years away, there are actions you can and should take now to prepare.

  • At the very least, be sure that any new instruments that extend out past the end of 2021 include adequate “fallback language” that clearly states which rate will be referenced in the event that LIBOR is no longer available as a benchmark.
  • For existing instruments that extend past the end of 2021, financial institutions might consider proactively negotiating new fallback language.
  • Any fallback will likely have to include a conversion rate to bridge the gap between the alternative rate and LIBOR. For example, because SOFR is a risk-free rate and LIBOR is not, an adjustment to the SOFR will be necessary to make it commensurate with LIBOR. The goal of these conversions should be no or minimal value transfer between parties. Conversions from LIBOR to SOFR that are seen to favor a financial institution will introduce reputation, legal, and compliance risk.
  • To mitigate reputation and legal risk, any move to a new reference rate should be preceded by early and frequent communication with the institution’s customers that clearly explains the institution’s transition plans, and provides education on the LIBOR phase-out.
  • Work with third parties to ensure they are taking LIBOR-transition steps that mirror your efforts.

Be Mindful of Steps That Are Yet to Come 

The LIBOR transition is not a case of “set it and forget it.” Stay abreast of any additional information coming from regulators and the market.

  • Just as they need teams to keep LIBOR transition efforts on track, organizations should have mechanisms in place to ensure they are aware of key guidance and trends. For example, the Alternative Reference Rates Committee on April 25, 2019, issued recommendations for more robust fallback language for new originations of syndicated loans and floating rate notes. ARRC is expected to follow up with recommended fallback language for other instruments.  Other key information and data yet to be issued or determined regarding the LIBOR transition includes guidance regarding its federal income tax implications, the development of more and longer tenors for the SOFR, and industry standard conversion factors.   
  • Keep track of how competitors and the industry as a whole are navigating the transition, as this may inform your strategy and the timing of your transition actions.  
  • Be ready to adapt plans and strategies when changes become necessary.


Considering all that is at stake, financial institutions must explain their LIBOR transition efforts with the utmost of clarity and care.

  • All stakeholders should be made aware of and as comfortable as possible with the transition, including customers, the board, counterparties, rating agencies, and investors. Communicating with the board can be instrumental in setting the necessary tone from the top. Communicating with customers, especially about the conversion factor to put LIBOR and the alternative rate on par, can help avoid reputation-harming complaints and conflicts.
  • Organizations should also be prepared to eventually explain their plans and actions to U.S. regulators, who may choose to follow the U.K. by requiring such disclosures.
  • Train and educate staff to ensure the quality, professionalism, and accuracy of all communications.  

Thank you for your attention to this crucial matter, and for your continuing support of RMA.

Please contact your RMA representative for more information on how RMA can be of assistance.