LIBOR Transition

LIBOR Transition
LIBOR Transition


The London Interbank Offered Rate (LIBOR) which is used to set pricing for over $300 trillion in financial products is being replaced after 2021. The Secured Overnight Financing Rate (SOFR) is emerging as a top contender for the alternative risk-free rate (RFR) in the US with other jurisdiction working groups recommending others such as SONIA, €STR, SARON, and TONA.

What is LIBOR?

The London Interbank Offered Rate (LIBOR), an average rate calculated from estimates submitted by leading banks, has long been the go-to average rate at which certain banks could borrow in the interbank market. Duration ranges from overnight to 12 months. In 2014, the Financial Stability Board (FSB) set a series of recommendations for strengthening existing benchmarks for key interbank offered rates (IBORs) and began promoting adoption of risk-free reference rates (RFRs).

Why is Replacement Needed?

  • Durability: The alternative RFRs selected so far by jurisdiction working groups are based on robust, liquid underlying markets, making them much more durable.
  • Appropriateness: Jurisdiction working groups have determined that alternative RFRs represent a more appropriate benchmark for products and transactions that do not need to incorporate the credit risk premium embedded in the IBORs.
  • Risk Reduction: Currently price alignment interest (PAI) for cleared transactions and discounting is typically based on overnight rates, while interest rate derivatives primarily reference IBORs. Alternative RFRs are expected to be used in both instances, which will reduce basis risk.

What’s Next?

Financial institutions should be proactively working to transition away from LIBOR, as regulators have made clear. A starting point for a LIBOR strategy will begin with the document population that defines a bank's LIBOR terms. Contract conversion will require a complete understanding of existing contract population, relevant document types, linking of amendments and applicable clauses. Contractual triggers and “if then” scenarios must be understood before conversion to alternative RFR. To appropriately manage risk, duration and hedge effectiveness of the selected alternative RFR should be examined and understood. Technology (data repositories, providers, middleware, core systems) and data will be heavily impacted so action plans should be implemented to ensure the data requirements of the RFR are captured and managed effectively. Day one balance sheet impacts, fair value assessment, hedge accounting, accounting classification, and cash products will all be affected by the change to an alternative RFR. Fair value changes may impact taxation of firm. Contractual renegotiation and/or closeout may accelerate tax recognition.

Protiviti’s subject matter experts possess the skills and required expertise to help organizations face the major challenges of LIBOR replacement proactively and ensure a well-managed, risk-informed transition to alternative RFRs.


How Protiviti Can Help:

Document Population / Terms Extraction

Our Document Management capabilities can find documents on your share drives or repositories, classify them by document types, and extract relevant terms to help your organization assure completeness and accuracy of records. These documents and terms can be placed in a repository for reference in the IBOR transitions.

Contract Transition

We can help create a roadmap from present state to final RFR adoption that will help your organization understand the challenges related to accounting, tax, valuation and risk management. The transition plan will allow your organization to feel comfortable in moving from present state to a new RFR.

Infrastructure and Data

Our technology consulting experts can assist with all areas of IT and Data to make the transition to a new RFR seamless. 

Governance and Controls

Setting up a proper governance and control framework from initiation, we will make sure there are no gaps in the transition and allow the future state to be smoothly implemented in your organization.

Regulatory Considerations

Our Risk and Compliance practice is made up of former industry professionals and regulators. We can assure 360 degree coverage on your transition so that all regulatory obligations of the transition are satisfied.