Collateral Update: Transitioning to a Successor LIBOR Index

David Messina, head of collateral risk management at the Bank, outlines steps for transitioning mortgage collateral from LIBOR to a successor index, with key dates and deadlines.

Photo of David MessinaAs you may know, the more liquid tenors of the London Intrabank Offered Rate Index, or LIBOR-index, including one-, three-, six-, and 12-month tenors, as well as the Overnight rate, will cease publication by the ICE Benchmark Association (formerly the British Bankers Association) after June 30, 2023.

As the cessation date approaches, the Bank is requesting that our members provide updated information regarding their plans to transition pledged adjustable-rate mortgages that are currently indexed to LIBOR to a successor index. For many members choosing to adhere to the LIBOR Act and the Alternative Reference Rates Committee (ARRC) guidance on LIBOR fallback indices, the choice of the successor index is likely to be SOFR, with a phased-in spread adjustment. Members choosing an alternative to SOFR may still be allowed to pledge and receive borrowing capacity against their previously LIBOR-indexed loans; however, the Bank may need to contact your institution to determine whether any updates are required to your Mortgage Collateral Update (MCU) file. Additionally, there may be valuation effects, depending on the choice of successor index, which could potentially reduce the borrowing capacity of previously LIBOR-indexed collateral.

To ensure an orderly transition to LIBOR successor indices, it is important that your institution work closely with your FHLBank San Francisco team to transition your LIBOR-indexed pledged collateral to a successor index. 

Please keep these important dates in mind as you prepare for the transition to your choice of index to replace LIBOR.

Key Dates and Deadlines

January 31, 2023 – Members pledging LIBOR-indexed loans should provide their choice of successor index to the Bank by the end of January 2023. The choice of successor index and additional relevant informational, if any, such as tenor and spread or loan margin adjustments, should be identified using the template provided by your Collateral Asset Manager. Members can also communicate their successor index to the Bank’s Collateral Services team. Please note that if you are choosing to use the ARRC’s recommended LIBOR fallback successor index, it should be referenced as “SOFR – Fallback,” not as “SOFR.”

March 31, 2023 – Members who have not provided a certification on their choice of a successor index for LIBOR-indexed loan collateral will receive an additional haircut on LIBOR-indexed collateral beginning in the second quarter of 2023. The Bank may also increase the haircut on pledged LIBOR collateral through Q2 2023, until the LIBOR cessation date, with an unspecified successor rate index.

June 30, 2023 – Official LIBOR cessation date – Members pledging under Blanket Lien Detail and specific listing pledge programs should begin reporting the new successor index on all new MCU file uploads beginning July 1, 2023. For members pledging under Blanket Lien Summary, any unconverted LIBOR-indexed loans should be reflected as ineligible on your quarterly or semiannual certifications.

August 31, 2023 (Expected) – Any pledged loan that is reported as being indexed to a legacy LIBOR Index will no longer be eligible to receive borrowing capacity after August 31, 2023. The interim period between July 1, 2023, and August 31, 2023, is to allow floating rate indexed loans with a look back period to be reported with accurate rate and index information until their first post-LIBOR reset date.

At FHLBank San Francisco, we understand how critical the LIBOR transition period is to our member institutions. We are committed to working with your institution to ensure that your existing LIBOR mortgage loan collateral can continue to be pledged and borrowed against using an alternative floating rate index. Over the next six months, the Bank will be in contact with member institutions who are pledging LIBOR-indexed collateral to obtain information, such as the successor rate index, necessary for us to facilitate the transition process. Bank team members may also be in contact with your operations teams during this time to answer any questions and perform updates to your collateral pledge files as needed. We appreciate your continued assistance in managing the LIBOR transition process and minimizing any disruption to your institution’s borrowing capacity or access to our liquidity products and service offerings.

Additional LIBOR transition related information, including frequently asked questions, can be found in the Member Solutions section of our website.

Please reach out to your Relationship Manager or Collateral Asset Manager with any questions about the Bank’s LIBOR transition timeline or how it will impact your institution’s loan pledge processes. If you need assistance updating your MCU to reflect the successor index, contact us at memberdata@fhlbsf.com

We thank you for your membership!