LIBOR Replacement

Background

For many years, TD Bank and financial institutions around the world used the London Interbank Offered Rate (LIBOR) as a benchmark for setting interest rates. However, LIBOR has ceased to be a reliable rate and is being replaced with alternative reference rates (ARRs).

The change was set in motion by the 2008 financial crisis which revealed LIBOR's lack of transparency and vulnerability to manipulation. Over time, however, as the number of transactions has decreased, it relied more heavily on subjective judgment.

On March 5, 2021, the ICE Benchmark Administration (IBA), the administrator for LIBOR, announced that it will stop publishing LIBOR as of the dates below:

  • USD – 1-week and 2-month Tenors – Final Publication Date: December 31, 2021
  • USD – All Other Tenors – Final Publication Date: June 30, 2023
  • GBP: British Pound Sterling – All Tenors – Final Publication Date: December 31,2021
  • EUR: Euro (EUR LIBOR) – All Tenors – Final Publication Date: December 31, 2021
  • CHF: Swiss Franc – All Tenors – Final Publication Date: December 31,2021
  • JPY: Japanese Yen – All Tenors – Final Publication Date: December 31,2021
  • CDOR – 6- and 12-month Tenors – Final Publication Date: May 17, 2021

In addition, they are extending the publication of remaining USD LIBOR tenors until June 30, 2023 to allow legacy contracts to mature or be renewed on an ARR before LIBOR ceases to be published.

More information is available at ICE LIBOR® Feedback Statement on Consultation on Potential Cessation.

With LIBOR on its way out, regulators and industry groups are working to select new benchmarks for setting interest rates on loans and other products.

Groups like the Federal Reserve Bank of New York's Alternative Reference Rates Committee (ARRC) and the International Swaps and Derivatives Association (ISDA) have been working to identify new reference rates based on observable transactions that represent actual market activity. The ARRC recommended the Secured Overnight Finance Rate (SOFR ) as an index to replace LIBOR in loans and other financial instruments.

Regulators aren’t dictating the use of a particular alternative reference rate. Instead, market participants will choose from among various alternatives.

Unlike LIBOR, Secured Overnight Financing Rate (SOFR) is an overnight rate, not a term rate. It's a broad measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, calculated by a volume-weighted median of this transaction-level data.


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