Considerations for Wells Fargo customers with loans and related hedges
New LIBOR fallbacks for derivatives
To support the transition away from the London Interbank Offered Rate (“LIBOR”), the International Swaps and Derivatives Association, Inc. (“ISDA”) has published (1) amendments to its standard definitions of various interbank offered rates, including LIBOR, to add new fallback language and (2) a related protocol (the “Protocol”), to enable parties to amend existing transactions consistent with the fallbacks in the amended definitions. The new LIBOR fallbacks are intended to facilitate a smooth transition from LIBOR to alternative reference rates at the time LIBOR ceases or is deemed by its regulator to be unrepresentative of underlying markets. The fallback rate for U.S. dollar LIBOR is an adjusted version of the Secured Overnight Financing Rate (“SOFR”) and the fallback rate for sterling LIBOR is an adjusted version of the Sterling Overnight Index Average (“SONIA”).
While these new ISDA-published fallbacks and the related Protocol (to which Wells Fargo has adhered) are a very helpful and important part of the LIBOR transition, we are aware that, for certain Wells Fargo customers (including those with interest rate swaps intended to hedge loans), adhering to the Protocol or incorporating the ISDA-published fallbacks through a bilateral agreement may only partially address transition-related considerations:
- First, the Protocol will not amend all transaction documents. For example, loans are not likely to be amended by the Protocol.
- Second, even where loans can be amended, there may be mismatches between fallbacks for derivatives and loans. This is because operational systems used for loans will likely not be designed to use the fallback rates in the same manner as operational systems used for derivatives.
As such, market participants with loans and related interest rate derivatives that adhere to the Protocol or incorporate the ISDA-published fallbacks through a bilateral agreement may realize some benefits, but such actions may not fully address their particular circumstances, as it could result in basis risk between the related products or have other unintended consequences.
Where you can get more information about the risks and options
We encourage you to consider the best options available in light of all of your individual facts and circumstances, including moving all of your transactions away from LIBOR ahead of a LIBOR cessation, in order to avoid reliance on fallback provisions. In many cases, this switch may be appropriate at the time when the replacement rates for loans are available and before LIBOR becomes unrepresentative (e.g., when relevant loans come up for renewal). This could provide the opportunity to negotiate a hedging agreement that best suits your particular hedging objectives. Contact your Wells Fargo derivatives team for more information about potential mismatch risks related to the LIBOR transition as well as hedges available for loans referencing SOFR, SONIA and other reference rates.
We encourage you to consult your own financial and other advisors regarding the impacts of the LIBOR transition on your financial products, including hedge products such as swaps. Important disclosures regarding swaps, including those related to the LIBOR transition are available. More information is available on the Wells Fargo LIBOR website.
Version: October 22, 2020
