Clock is ticking… Bye, LIBOR in El Salvador

By: Annette Herrera

The London Interbank Offered Rate (LIBOR) has long been one of the most important benchmark rates in the financial world, but its full discontinuation is around the corner. LIBOR has been discontinued in all its currencies and terms as of December 31, 2021, except for references in US dollars for one-day, three-, six- and twelve-month terms, which will be published until June 30, 2023. The decision to discontinue LIBOR was made due to concerns about its integrity and reliability.

Prior to its discontinuation, LIBOR relied on a daily survey by a panel of banks reporting the rates at which they believed they could borrow funds from other banks in the interbank market. However, after a series of financial scandals, it was discovered that some banks had manipulated LIBOR to profit in their financial operations. This raised questions about the integrity of the rate and prompted regulators to consider alternatives.

Consequently, several alternative reference rates have been created, such as the Secured Overnight Financing Rate (SOFR)[1] and the Sterling Overnight Index Average (SONIA) in the UK. These benchmark rates are based on actual transactions rather than bank surveys, making them more reliable and less susceptible to manipulation.

The discontinuation of LIBOR has brought uncertainty to creditors and debtors who have used this benchmark rate for credit agreements. The Alternative Reference Rate Committee (ARRC) of the New York Federal Reserve is the committee charged with ensuring that the transition from USD LIBOR is successful. The ARRC has made efforts aimed at adopting more reliable reference rates to replace USD LIBOR.

The SOFR reference rate is set on overnight repurchase agreement costs that are guaranteed by U.S. Treasury securities (Repo). For the determination of daily SOFR, the actual Repo transactions of the previous day are considered. The New York Federal Reserve publishes the daily SOFR rate on its website every business day at approximately 8:00 a.m. ET[2].

Although SOFR is a reliable benchmark, its overnight nature means that it is only [3]backward-looking and has no forward-looking perspective. However, SOFR now it is published on term (Term SOFR), which makes it more like LIBOR as it is a forward-looking rate. The SOFR Term is an estimated overnight SOFR rate for reference periods of one, three, six and twelve months. On 29 July 2021, the ARRC formally recommended using the reference periods for SOFR published by the CME Group.[4]

The implementation of the USD LIBOR rate change to SOFR rate in credit documents and their guarantees entails a series of actions by the creditors and debtors and/or guarantors. Each financing structure should be revised:

  1. Changes in the corporate approvals of the financing parties;
  2. Granting of modification of the credit agreement;
  3. Granting of new promissory notes or guarantee documents.

In El Salvador, to date, no bill has been introduced that seeks to regulate the transition from LIBOR to any other reference rate.

[1] The SOFR rate began to be published in 2018.


[3]Historically, because SOFR is a guaranteed rate and LIBOR is not, SOFR is lower than LIBOR, so the spread adjustment  must be revised.

[4]CME Group is an American company that provides a platform to bring comparators and sellers together for derivatives trading, operating more than 3 billion contracts per year, covering the widest variety of reference products available. You should consult the terms and conditions of the CME Group to use  the SOFR Term data  for the calculation of interest.