B. What is the Board-selected benchmark replacement? Contract Category Result Derivatives contracts In recognition that many derivative market participants have adhered to the ISDA Protocol, the LIBOR Act is consistent with the ISDA Protocol in selecting Fallback Rate (SOFR) as the Board-selected benchmark replacement for derivate transactions, and the LIBOR Regulation implemented certain other technical amendments to ensure that the calculation of the Fallback Rate (SOFR) under the LIBOR Regulations precisely matches the manner in which such rate is calculated under the ISDA Protocol. Commercial transactions (that are not FHFA-regulatedentity contracts or FFELP ABS)2 • Overnight LIBOR: the benchmark replacement is SOFR plus a spread adjustment of 0.00644%. • One-month LIBOR: the benchmark replacement is one-month CME Term SOFR plus a spread adjustment of 0.11448%. • Three-month LIBOR: the benchmark replacement is three-month CME Term SOFR plus a spread adjustment of 0.26161%. • Six-month LIBOR: the benchmark replacement is six-month CME Term SOFR plus a spread adjustment of 0.42826%. • 12-month LIBOR: the benchmark replacement is 12-month CME Term SOFR plus a spread adjustment of 0.71513%. Consumer transactions The Board-selected benchmark replacements for consumer loans are generally the same as for other cash transactions. However, for consumer transactions, the Board included a year-long transition of the tenor spread adjustment to prevent borrowers from experiencing significant, unexpected shifts in borrowing rates on and immediately following the LIBOR replacement date. Refinitiv Limited has stated that it will publish and provide rates for consumer loans that sum CME Term SOFR and the transition tenor spread adjustment (for the one-year period beginning on the LIBOR replacement date) or the tenor spread adjustment specified in the LIBOR Act (after that one-year period) consistent with ARRC rules and recommendations. These rates will be identified as “USD IBOR Cash Fallbacks” for “Consumer” products. For purposes of the LIBOR Regulations, those rates published by Refinitiv will be considered equal to the Board-selected benchmark replacement for such transactions. Other Considerations A. Technology Systems and Analytics Models Apart from ensuring that you are LIBOR-fallback-ready from the documentation perspective, you must also ensure that your bank is ready from the technology perspective. All loan and trading systems that use LIBOR as the reference rate will need to be re-coded to support the applicable tenor of SOFR. In addition, any analytics models used by your bank to ensure the appropriate evaluation of loan transactions (including those for pricing funds and evaluating risk) that are based on LIBOR will need to be updated or rebuilt to support benchmark replacements based on SOFR. By the end of 2020, most major loan system vendors created updates to support multiple calculations of SOFR. You should ensure that your bank has installed these updates and also test these systems (as well as user interfaces and downstream systems) before it’s time to go live. B. Contracts Subject to Swap Arrangements Require Special Attention to Ensure a Matching Hedge Any loans that are subject to hedging arrangements require special attention to ensure that the benchmark replacement and manner of calculation under the loan with your customer match the swap. As noted above, the board-selected benchmark replacements for derivatives transactions and for non-derivatives transactions are significantly different. If no action is taken and the board-selected benchmark replacement takes effect as a matter of law, then payments under the loan agreement will be different from payments under the hedge agreement, resulting in a mismatched hedge and increasing basis risk. If you are the “determining person” under the loan documents, then you can avoid a mismatched hedge by sending the borrower a notice 19 Colorado Banker
RkJQdWJsaXNoZXIy MTg3NDExNQ==