In 2018, the Federal Reserve’s Alternative Reference Rate Committee (ARRC) selected the Secured Overnight Financing Rate to replace USD LIBOR, the main reference rate used in credit instruments in the U.S. With more than $200 trillion of financial instruments based in USD LIBOR, the transition to an alternative reference rate should be followed closely.
CoBank and the Farm Credit System have been working diligently with several bodies responsible for providing feedback on the functionality of the financial system with a new reference rate. This page features some educational materials and resources to learn more about LIBOR and potential changes coming to the industry.
Frequently Asked Questions
What is LIBOR?
LIBOR is an estimate of the cost of borrowing/lending for banks on an unsecured basis.
How important is LIBOR?
U.S. Dollar LIBOR (London Interbank Offered Rate) is the dominant reference rate for financial instruments, particularly floating rate loans. The size of the contracts indexed to U.S. Dollar LIBOR is estimated to be as much as $200 trillion. Many floating rate loans in the rural agriculture and rural infrastructure sectors currently use U.S. Dollar LIBOR as a reference rate.
What is changing with LIBOR?
U.S. and international banking regulators have been expressing concern about LIBOR over the past several years. The primary concern is that the lack of a deep and liquid market in unsecured intra-bank transactions have reduced the reliability of LIBOR as an index and the market needs to transition to an alternative reference rate for floating rate transactions.
Has an alternative reference rate been proposed?
A committee convened by the Federal Reserve has recommended the creation of an alternative called the Secured Overnight Financing Rate (SOFR) as a replacement benchmark rate. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve began publishing SOFR trading data on April 3, 2018.
Throughout 2019, industry workgroups will be working to define a USD LIBOR alternative reference rate and the process for transitioning to it. The market has yet to determine the timing and the adjustments that will be made to the alternate rate in order to minimize any transfer of value.
What is CoBank doing with regard to this issue?
As members of several industry-wide committees, CoBank and other Farm Credit institutions are actively monitoring and participating in discussions by industry groups and financial regulators about the transition of LIBOR as a benchmark for floating rate transactions. It is expected that LIBOR will continue to be in use through at least 2021, but given the potential significance of the change, CoBank is actively reviewing the latest developments now to help prepare ourselves and our customers. CoBank, on behalf of the four Farm Credit Banks, submitted two consultations in 2018 to the ARRC for their consideration.
Vice President, Financial Regulatory Compliance
Jim Shanahan directs CoBank’s regulatory compliance activities, focusing on the treasury function, derivatives transactions, liquidity investments, debt issuance and related financial management activities.