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January 25, 2021updated 29 Jan 2021 9:43am

LTi transitions from Libor to SOFR ahead of schedule

By Alejandro Gonzalez

LTi Technology Solutions (LTi), a US-based provider of asset finance software and services active in the UK, has announced its transition from the Libor benchmark used by banks to set interest rates in loan agreements.

LTi said it will adopt SOFR in all versions of its Aspire Version 5 product.

SOFR is the Federal Reserve Bank of New York administered Secured Overnight Financing Rate.

Libor transition

The US dollar London InterBank Offered Rate, or Libor, is one of the main interest rate benchmarks used in financial markets, and it is being phased out as a loan benchmark because of the role it played in worsening the 2008 financial crisis as well as scandals involving Libor manipulation among the rate-setting banks.

The benchmark determines interest rates for financial contracts around the world, worth trillions of pounds. Financial regulators (including the EU’s European Banking Authority and the UK’s Financial Conduct Authority) have urged market participants to seek an alternative benchmark by the end of 2021.

LTi

In a statement, LTi said: “While the official end of Libor is still several months away, it has been imperative for LTi to take action now in order to ensure the efficient replacement of Libor without disruption.

“Users can enter SOFR compounded average or SOFR index rates and respective effective dates, provided by The Federal Reserve Bank of New York, into Aspire’s variable rate benchmark functionality to automatically modify contract payment and earnings schedules.

“This will allow Aspire users to recognise the impact of benchmark rate changes at whatever frequency is required by the agreement.

“Aspire’s rate change functionality also allows for simple implementation of the spread adjustment methodology recommended by the NY Fed alternative reference rates committee by allowing for a spread and benchmark change at a specified effective date by contract.

“Looking to the future, LTi is monitoring the development of an IOSCO-compliant forward-looking term rate. Per ARRC’s paced transition plan, a goal has been set to establish an administrator of forward-looking term SOFR with the initial rate published by the end of the first half of 2021.

“This forward-looking term rate would remove the operational risks of not knowing the prevailing rate for a contract until the rate period is effectively over while taking advantage of the fundamentals of SOFR as a risk-free rate.

“Users of Aspire would still leverage Aspire’s variable rate functionality, without the need to back-date the effective date of the rate change,” the IT company said in a statement.

Peter Haug, product manager of LTi, said: “The transition from Libor as a benchmark for variable-rate transactions to SOFR is a critical need for many asset finance companies.”

“LTI is committed to facilitating a smooth transition for our users and their impacted partners by guiding our users in the use of Aspire’s extensive variable-rate functionality and our deep understanding of regulatory guidance.”

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