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LIBOR transition market brief — Q3 2020

August 6, 2020
  • matt hoffman headshot


    Matt Hoffman

    Regulatory Advisory

    Real Estate | Kennett Square, PA


Chatham's update on the LIBOR transition, summarizing upcoming deadlines, recent news, and available resources to help you stay current as the market transitions away from LIBOR.

With all that’s happening in the market, it can be difficult to stay current with the London Inter-Bank Offered Rate (LIBOR) transition. To address that, we’ve prepared this summary of upcoming deadlines, along with some of the most impactful news from the last quarter.

Upcoming deadlines in the LIBOR transition through the end of Q4 2020.

Upcoming deadlines in the LIBOR transition through the end of Q4 2020.

Transition timing and interim deadline extensions

Even amidst the global COVID-19 pandemic (see May 2020 Chatham market update), regulators and other market participants have continued to lay out transition plans and indicate that they plan to stick to the existing LIBOR transition timeline. However, we have seen two interim deadlines slip, suggesting that interim timelines may have some flexibility, though most officials have suggested that we are not likely to see further extensions and that transition could even happen sooner than expected.

Extended deadlines in LIBOR transition

Two deadlines in the LIBOR transition have been extended due to COVID-19.

In February of this year, the Federal Housing Finance Authority (FHFA), which regulates Freddie Mac, Fannie Mae, and the Federal Home Loan Banks (FHLBs), announced two significant milestones designed to stop the agencies from writing LIBOR-based Adjustable-Rate Mortgages (ARMs) and Structured Adjustable-Rate Mortgages (SARMs). Soon after, the world began to shut down in the face of COVID-19, and the FHFA extended a previously-established interim deadline related to the FHLBs’ use of LIBOR-based instruments, giving them a 90-day extension. More recently, the agencies released their LIBOR transition playbook, suggesting that they’ll continue to take steps to move from LIBOR to the Secured Overnight Financing Rate (SOFR) by the end of the year, as further discussed below. In April, the UK’s Financial Conduct Authority (FCA) and the Bank of England announced a six-month extension of UK lenders’ deadline to stop issuing GBP LIBOR-based loans.

Chatham recommends that market participants continue to prepare for transition as though there will be no easing of timing, though extension of deadlines, whether interim or final, is always possible.

LIBOR transition and Agency loans

In February 2020, Freddie Mac, Fannie Mae, and the FHFA laid out some clear deadlines to move the LIBOR transition forward over the course of 2020 and into 2021. Specifically, they announced that Freddie and Fannie will stop accepting LIBOR-based loan applications after the end of Q3 2020 and will stop purchasing LIBOR-based loans by the end of 2020. In Q2 2020, Fannie and Freddie released their LIBOR transition playbook, where they describe their plans to transition from LIBOR-based lending to lending based on SOFR compounded in advance. Their variable rate products will continue to require some form of interest protection, with Fannie offering to embed the cost of a cap into a SOFR-based loan and Freddie temporarily accepting LIBOR-based caps on SOFR-based loans, provided that borrowers meet criteria around replacement reserves, limited guarantees, and acceptance of Freddie’s updated form LIBOR cap documentation.

For more information on SOFR and its calculation conventions, see Chatham’s SOFR: an end-user's guide.

Market adoption and challenges

Through the COVID-19 pandemic to date, SOFR’s adoption has had some ups and downs.

SOFR cross-currency swap: As a positive sign for adoption, Chinese markets began to warm up to SOFR, including through execution of first USD/CNY cross-currency swap using SOFR towards the end of April.

Main Street Lending Program: On a less promising note, in April 2020, the Federal Reserve introduced the Main Street Lending Program in response to the pandemic and initially proposed using SOFR as the index underlying loans to small and medium-sized businesses; but in response to negative market feedback, largely from regional and community financial institutions, they switched to using LIBOR. The Fed lays this out in detail in their FAQ, and Bloomberg also provides analysis here.

Other open issues: SOFR has also faced challenges in a lack of liquidity in SOFR derivatives and the growing concerns over SOFR’s lack of a credit component, which AMERIBOR, the ICE Bank Yield Index, and IHS Markit’s dynamic credit spread have been designed to address. Amidst this market dynamic, on July 21, ISDA and Bloomberg announced that Bloomberg has begun calculating and publishing fallbacks that ISDA intends to implement to facilitate the transition from USD LIBOR to SOFR.


Speak to a Chatham expert

Please reach out to the Chatham team if you have questions about how the LIBOR transition could impact your loans and derivatives.

About the author

  • Matt Hoffman

    Regulatory Advisory

    Real Estate | Kennett Square, PA

    Matt is a Director on Chatham’s Real Estate team. He works with clients, industry partners, and policymakers, using Chatham’s unique experience and expertise to benefit individual clients and the industry.


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