From LIBOR to SOFR

A quick guide to upcoming changes in key interest rates

Information available on this site is provided for existing Global Wealth Management Americas clients with existing LIBOR-referencing positions or products only.

Have you heard of the London Interbank Offered Rate, otherwise known as LIBOR? Whether you’re familiar with it or not, LIBOR is expected to be discontinued by the end of 2021, when most US loans and LIBOR-related investments are expected to use the Secured Overnight Financing Rate (SOFR).

What is LIBOR?

LIBOR is the interest rate benchmark that the financial industry has used to set interest payments for more than US $400 trillion in mortgages, futures, corporate bonds, derivatives and other financial vehicles. LIBOR is updated daily and reflects the average interest rate submitted by the panel banks, based on what they would be charged if they were to borrow from other banks.

Why is the industry moving to SOFR?

Since the financial crisis in 2007/2008, the daily volume of interbank transactions underlying the LIBOR fixing has collapsed. Market participants increasingly raised concerns because of the reduced level of underlying transactions.

Acting on recommendations set forth by the Financial Stability Board and Financial Stability Oversight Council, the Federal Reserve Board and the New York Fed convened the Alternative Reference Rate Committee (ARRC) to identify an alternative to LIBOR. Their conclusion? Within the US, ARRC identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative benchmark.

Will this change affect me?

Directly, or indirectly, it’s likely you’ll be affected in some way. The LIBOR to SOFR transition will impact securities backed lending, mortgages, commercial real estate loans, as well as credit/bonds, structured products, derivatives and other products that reference LIBOR. While rates, valuations or other aspects for these offerings will change after the migration to SOFR is complete, the extent of your individual impact will vary, based on your circumstances and exposure. Please note that SOFR may not be the only alternative reference rate benchmark.

As for investments, the transition to an alternative reference rate could affect cross currency swaps, exchange-traded derivatives, structured products, securitization, exchange-traded funds, preferred stock, corporate and municipal bonds, and other fixed income contracts that tie to LIBOR with maturity beyond December 2021.

What will happen to existing contracts and positions?

Some contracts, prospectuses, offering documents, disclosures, etc. may have “fallback” provisions that either provide an alternative benchmark or allow for a change to an alternative benchmark. Now that the switch is scheduled to occur in 2021, most LIBOR-based contracts will need to be amended. Third-party-issued securities will be addressed by the respective issuer. Importantly, continuity and a smooth transition are the aim of all major financial companies required to make this transition.

Impacted loans or investments should undergo the transition away from LIBOR before December 2021. UBS plans to send product-specific communications for any UBS-issued securities and loans impacted by LIBOR. For securities issued by third parties, UBS anticipates that these issuers will be making available relevant information to investors of impacted securities.

Do I need to do anything to prepare?

You should understand whether the transition from LIBOR will affect both your investments and your loans. Regarding the investments, we suggest you speak to your UBS Financial Advisor and make a determination as to whether you are comfortable with your investments tied to LIBOR. For loans held at UBS, we will provide more details as we approach the transition date in 2021.

Where can I learn more?

Visit ubs.com/libortransition for more details. Your UBS Financial Advisor can also help you understand what’s to come as the transition to SOFR progresses.