Counting down: What to consider as LIBOR sunsets
What steps do you need to take when the benchmark interest rate changes?
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Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company. The views expressed by the presenter do not necessarily reflect the views of Wells Fargo or its affiliates.
LIBOR transition risks
This information is not intended to override, and should be considered in conjunction with, any disclosures, or other statements identifying potential risks provided to you by Wells Fargo Bank. The events described in these Materials could have unpredictable and material consequences for transactions, products, and services that require payments or calculations to be made by reference to LIBOR. These consequences include, but are not limited to, the following:
- value change: changes to the way in which the relevant interest rate benchmark is calculated, or differences in the way a replacement alternative reference rate (“ARR”) is calculated, could materially affect the value, price, cost and/or performance of affected contracts;
- mismatches: the way in which and the time at which ARRs are introduced may differ across connected affected contracts such as loans and their related hedges or across underlying assets and bonds in a securitization, and those differences may create material economic mismatches and introduce basis risks;
- lack of certainty: some existing affected contracts may not provide any fallback language or contemplate a replacement rate; as such, there could be disputes about what replacement rate applies as and when the relevant interest rate benchmark is unavailable or is no longer representative, or whether contracts are enforceable in the absence of any replacement rate;
- development of new rates: new alternative rates are likely to be developed over time and these new rates may be materially different from both the relevant interest rate benchmark and replacement rates that are currently being considered;
- inability to use a rate in new products: existing or new regulations may limit the ability of market participants to enter into new transactions, products, or services linked to the relevant interest rate benchmark if a determination or announcement is made that such rate is no longer representative of the relevant market;
- selection of a replacement reference rate: Wells Fargo may have rights to determine a replacement rate for the relevant interest rate benchmark for affected contracts, including any price or other adjustments to account for differences between the replacement rate and the existing rate, and the replacement rate and any adjustments we select may be inconsistent with, or contrary to, your interests, expectations or positions;
- risks relating to risk-free rates: as ARRs are overnight rates (some of which have started to be published only relatively recently), there may be limited liquidity in the market for financial contracts referencing an ARR, uncertainty as to the future performance of the ARR, uncertainty as to if and when term rates will be developed for an ARR, and possible discrepancies in approaches to calculating the compounded ARR over the interest period; and
- possible tax, accounting, or regulatory impact: moving from the relevant interest rate benchmark to a fallback or replacement rate may raise a variety of tax, accounting, and regulatory risks such that the product or service no longer meets the purpose you originally intended it to serve or is no longer compatible with the discounting rates or systems that you currently operate.
Wells Fargo cannot provide any assurances as to the consequences, or likely costs or expenses associated with any of the changes arising from the LIBOR transition, though they may be important to you. The above is provided for informational purposes only and is not intended to apply to any specific customer or transaction.
Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.