August 2020 Foodman website and JD Supra

The London Interbank Offered Rate (LIBOR) expires at the end of 2021.  Used since the early 1980s, LIBOR is the most referenced global short-term interest rate, and a “standard benchmark”.  It is the pricing benchmark for an estimated $350 Trillion in financial transactions worldwide that include:  

  • credit cards
  • home loans and mortgages
  • company loans
  • agreements or contracts (forwards and futures) that reference LIBOR such as asset-backed securities, floating-rate notes, preferred stock, derivatives, and hedges
  • automobile loans and student loans

The Federal Reserve Board and Federal Reserve Bank of New York (in cooperation with other U.S. agencies) recommend the Secured Overnight Financing Rate (SOFR) as an alternative to the USD (“U.S. Dollar”) LIBOR.   The Practical Implementation Checklist for SOFR Adoption  published by the New York Fed in September, 2019,  clearly provides (among other recommendations) the importance of: 

  • Taxation and Regulatory considerations
  • Technical accounting considerations along with related reporting considerations
  • A robust corporate governance framework

Regardless of  benchmark rate that is adopted after the end of LIBOR, affected stakeholders ought to establish a Corporate Governance structure for its implementation and ongoing use. Among other steps, the Corporate Governance structure ought to set out the execution, management and monitoring of the transition, identification of contracts that reference LIBOR, training for employees and education of clients.  Some steps that can be taken include:

  • Engage senior management oversight to take accountability for a corporate governance structure to execute, manage, and monitor the transition.  Establish a Task Force.
  • Identify the inventory.  What business, functions, products, contracts, models, processes, and systems currently utilize LIBOR?
  • Training, training, and more training.  Employees and clients must be trained on the transition. Financial Institutions and Companies ought to communicate with all the stakeholders involved and be transparent about all the potential accounting and financial changes from the transition from LIBOR to another benchmark.
  • Coordinate efforts with different internal departments such as treasury, tax, legal, and procurement to make sure that all relevant business implications are dealt with appropriately and in a timely manner.
  • Stay on top of all regulatory developments.

Consult your Corporate Governance expert for the transition from LIBOR to SOFR

The impact of LIBOR expiration cannot be overestimated. The creation of an effective roadmap within Corporate Governance is critical for the success of the transition.  All Businesses that are impacted by this transition ought to consult a Corporate Governance expert to ensure that this hot topic is not at the forefront of a Regulator during an examination.