By now it is common knowledge that calculating commercial interest rates using LIBOR is no longer possible; the disclosure of LIBOR manipulations tolled its death knell.  The influential New York Federal Reserve Bank has proposed a replacement metric (“Term SOFR”), which will permit a transition from LIBOR to a commercially accepted replacement. .

The announced terms of use of Term SOFR, however, bar utilization in certain interest swaps.  The details of the impact of this limitation, and possible work-arounds, are beyond the scope of this post.  Borrowers seeing to hedge future interest rate exposure are going to need to resort to detailed risk analysis, guided by professional input.  To the extent hedges are important financial protections for public registrants, expect some interesting disclosures.  The good news is that it is likely that the marketplace will establish generally accepted instruments to address the present disconnect.

Greater detail is available on my firm’s website. https://duanemorris.com/alerts/libor_term_sofr_formally_recommended_all_done0721.html#start-text