The global financial industry is preparing to transition away from a key benchmark interest rate — the London Interbank Offered Rate, or LIBOR — to new alternative rates. Regulators have called for a market-wide transition away from LIBOR by the end of 2021.

If you have an adjustable rate loan or a corporate loan, chances are some of your transactions may be tied to LIBOR, or certain investments you hold might use LIBOR as a benchmark. As the industry shifts away from LIBOR to alternative reference rates, we’re here with you every step of the way — to help you understand the new rates and how these changes may impact your transactions in the future, as well as help you determine the alternative rate that best meets your borrowing needs.

This global transition is an evolving process — as plans are being finalized across the industry, many details are still unknown, and we may not always have all of the answers. But we’re an active member of global industry working groups, and we’re taking action to meet planned milestones. We’ll continue to follow developments, take necessary measures, and provide critical information to support a smooth transition for our customers.

Understanding the LIBOR transition

Why it’s significant

LIBOR is a series of benchmark interest rates that is used to price a wide range of products, including residential mortgages, student loans, corporate loans, corporate bonds and other securities, and derivatives. Financial transactions totaling over $400 trillion worldwide are tied to LIBOR, so the transition will affect almost every area of the financial markets.

The effort to replace all LIBORs is an organized global initiative. International working groups have been established to identify appropriate alternative reference rates and develop a transition strategy for each currency’s LIBOR to alternative reference rates. Wells Fargo is an active member of many of the international working groups, including the Alternative Reference Rates Committee in the U.S.

Why LIBOR is being replaced

LIBOR has been a long-established global benchmark for interest rates, but its credibility has declined over the past decade. During the financial crisis that began in 2007, LIBOR sometimes behaved in unpredictable and volatile ways.

Although improvements have been made to the system, the volume of transactions supporting LIBOR continues to shrink, and the calculation of LIBOR is increasingly perceived as a subjective process based more on hypothetical transactions and judgment than actual transactions. As a result, the regulator of LIBOR called for the market to transition to more robust reference rates.

What’s replacing LIBOR

Regulators worldwide convened currency-based working groups to recommend alternative reference rates to serve as alternatives or replacements for the different currency IBORs, as shown in the following table:

LIBOR
Alternative reference rate
Acronym
U.S. dollar (USD) LIBOR
Secured Overnight Financing Rate
SOFR
GBP LIBOR
Reformed Sterling Overnight Index Average
SONIA
EUR LIBOR1
EURIBOR2
EONIA

Euro Short-Term Rate
€STR
CHF LIBOR
Swiss Average Rate Overnight
SARON
JPY LIBOR
TIBOR1

Tokyo Average Overnight Rate
TONAR

1. Not expected to be discontinued.

2. EONIA was recalibrated on October 2, 2019, to be €STR + 8.5 bps. It will be published in this manner until January 3, 2022, at which point it will be discontinued.

In some jurisdictions, the new alternative reference rates are expected to coexist alongside certain reformed interbank offered rates, such as EURIBOR and €STR in the case of the euro or TONAR and TIBOR in the case of the Japanese yen.

Timeline for replacing LIBOR

The key date for the LIBOR transition is the end of 2021. Regulators across the globe are encouraging market participants to stop using LIBOR by that time.

As we get closer to the end of LIBOR, several key milestones — including implementing contract, operational, and infrastructure changes to deliver new rates and products to the market — will aid all transition efforts as 2020 and 2021 unfold.

Brokerage/Fixed income investors

Now may be a good time for investors with an out-sized exposure to LIBOR-based preferred stocks and/or LIBOR-based debt securities to reconsider their investments and, if necessary, exit or reduce their exposures accordingly. Please read our Fixed Income Research Analyst reports below:

   

What we are doing to prepare

We have already taken several steps to build the foundation for the transition as we continue to listen to customers’ concerns. Here’s what we’ve done so far:

  • Establish the LIBOR Transition Office: To manage the transition for our customers and provide oversight for the company, Wells Fargo’s Chief Financial Officer established this dedicated program office in 2018. The LIBOR Transition Office is staffed with full-time subject matter experts in major disciplines necessary for a successful transition — including consumer products, cash products (such as loans) and derivatives, project management, and communications. To ensure that we’re in touch with the very latest developments, the LIBOR Transition Office represents the company on industry groups and committees related to the LIBOR transition. 
  • Provide customer education: It’s important that all our customers understand this global market change and the impacts. Since September 2018, we have undertaken a major effort to talk directly to customers about the transition and listen to concerns. We’ve already conducted customer outreach in dozens of U.S. cities and our international markets, with additional outreach efforts planned in the future. As the transition evolves and we develop guidelines and protocols for contracts and product offerings, we’ll continue to update our customers. 
  • Implement new contract language and products: Some existing LIBOR contracts don’t provide for a replacement rate — at the time that many of these contracts were written, there was no thought that LIBOR might go away permanently one day. In those situations, contracts may need to be amended to include language that designates a replacement rate. For new LIBOR-based contracts, we’re proactively including this type of language — commonly referred to as “fallback language.” We’ll also be offering additional new products as the market continues to shift away from LIBOR.

Learn more

To ensure that you and all our customers are informed with the appropriate information and equipped to make educated decisions, we’ll continue to provide you with helpful resources. 

For more information about the LIBOR transition, refer to the following: 

You can also find industry information on the transition away from LIBOR, other interest rate benchmarks, and the Private/Public-Sector IBOR Transition Working Groups: