We all (should) know that LIBOR is an interest rate by which major banks borrow from one another; it also has constituted the “reference rate” for the pricing of credit transactions of all sorts in commercial and financial situations: bonds; loans; mortgages; interest swaps, and the like.
After 2021, LIBOR will be discontinued. Various world economies are working to replace LIBOR with a different, generally accepted reference rate mechanism.
To fully understand the depth of the potential issue for existing financial relationships, it is informative to look at the July 12 staff statement issued by the Securities and Exchange Commission. There is a detailed discussion of how companies should transition from LIBOR. The theme of the nine page SEC statement is: you had better start addressing this now, given many “legacy contracts” which specifically reference LIBOR.
There is also this warning: even if a replacement rate has been specified, over the passage of time has that rate ceased to be logically applied to any given contractual arrangement?
For new contracts, it is suggested that companies might choose a different, non-LIBOR rate even today.
Finally, there is warning that information technology systems may not be amenable to a transition from LIBOR or handle the establishment of a different base rate. This would be a compliance issue for management to address in advance of the switchover date. And, since this information comes from the SEC, there is an admonition that the risks and concerns for any given public business must not only be addressed internally but also must be shared with the investing public through appropriate disclosure. The SEC’s Office of the Chief Accountant is particularly focused on these issues as they impact financial reporting.