Companies lagging on LIBOR transition will prompt lawsuits

Sep. 29th, 2020

Nick Youngson

There’s little chance regulators will delay the December 2021 transition because of the pandemic, specialists say.

Most executives either haven't started thinking about moving away from LIBOR or are just now doing so even though the transition is approaching and unlikely to get pushed back because of the pandemic, according to a webcast by global advisory firm Duff & Phelps.

U.S. and European Union regulators are replacing the London Inter-bank Offered Rate (LIBOR) at the end of 2021, a move that creates administrative and potential liability headaches for businesses across the board.

Since the mid-1980s, LIBOR has been the go-to rate for most commercial and consumer loans, structured products, contractual agreements, derivatives, corporate securities, floating rate instruments, and benchmarked instruments.

Regulators called for a transition away from the index after the 2008 financial meltdown because of increasing problems with the credibility of the rates it was based on. In the U.S., regulators are expected to support what's known as SOFR, or the Secured Overnight Financing Rate, as its replacement. In the E.U., the preferred replacement is expected to be SONIA, the Sterling Over Night Index Average.

The transition puts businesses under the gun to look at their investments, loans, hedges, contracts and other potential exposure points. They must assess which changes, if any, are needed to account for the end of LIBOR, something that was never contemplated when many of these instruments were created.

For most businesses, the transition burden falls on CFOs, an informal poll conducted during the webcast shows. Almost half of the attendees named the CFO as the point person; no other executive came close.

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