1. Michela Daliana Hawkins Delafield & Wood LLP mdaliana@hawkins.com
National Council of Higher Education Resources 2018 April Legal Meeting
Student Loan Finance: LIBOR and Related Federal Tax Issues April 13, 2018
Michela Daliana Hawkins Delafield & Wood LLP
(212)
Kenneth B. Roberts Hawkins Delafield & Wood LLP (212)
Joseph A. Santoro Bank of America Merrill Lynch (646)

2. What is wrong with LIBOR?
What exposure do student loan programs have to LIBOR?
What is being done about LIBOR?
How will the new index be determined?
When will the new index be introduced and usable?
Related federal tax issues

3. What is wrong with LIBOR?
London Interbank Offered Rate (“LIBOR”) was created in 1986 as a British Banking Association-sponsored reference rate based on participating banks’ own funding operations as a proxy for high credit short term rates
Universal acceptance of LIBOR methodology for most of the past 30 years has resulted in literally hundreds of trillions of dollars of private party and governmental exposure in multiple markets
During and post the 2008 Fiscal Crisis it became apparent that LIBOR had, in practice, become subject to manipulation
Post-Fiscal Crisis central bank and market regulatory policies conceptually undermined the LIBOR mechanism

4. LIBOR use in the USD market
Source: New York Federal Reserve; Market Participant Group (2013)
1) Some Overlap exists between estimates of syndicated and corporate business loans

5. LIBOR use in the USD market
USD OTC Derivative Growth ($TN)
Source: BofA Merrill Lynch Global Research, BIS
Note: notional outstanding

6. What exposure do student loan programs have to LIBOR?
Student loan issuers have an unusual variety of types of exposure to LIBOR
No substitute for review of actual documents, but some generalizations may be made
ARS
LFRN
Bank Credit or Loan Document Provisions
FFELP SAP Rate
State program regulations and program contracts may refer to LIBOR
Investments
Derivatives

7. What exposure do student loan programs have to LIBOR?
The most important exposures for student loan issuers are shared with small fractions of global LIBOR exposure
Several of these exposures are longer dated than most global LIBOR exposure
Two are considerably harder to change
FFELP SAP Rate
LFRN
State programs are less able to absorb increased LIBOR risk than most financial institutions and operating entities

8. What is being done about LIBOR?
The International Organization of Securities Commissions (“OICU-IOSSCO”) Principles for Financial Benchmarks Final Report (July 2013) stated that benchmarks should:
“Be based on [data] formed by the competitive forces of supply and demand…to provide confidence that the price discovery system is reliable“
“Be anchored by observable transactions entered into at arms length between buyers and sellers in the market for the [i]nterest the [b]enchmark measures in order for it to function as a credible indicator of…values”

9. What is being done about LIBOR?
The UK Financial Conduct Authority (the “FCA”) has limited power to compel bank participation in LIBOR setting. In July 2017, the FCA announced that it would not compel or encourage participation after December 2021.
This does not mean that the FCA might not cease such actions prior to such date, that LIBOR setting or publication might not cease prior to such date or that LIBOR setting and publication might not continue after such date
This does not assure that the utility of LIBOR as a reference rate will not be materially affected by increased volatility or will not otherwise become less representative of market rates during and after this period

10. What is being done about LIBOR?
Several governmental regulators have determined to create separate currency specific alternative indices based on observed secured rates
In the US, the lead agency is the Federal Reserve Bank of New York (the “New York Fed”), which is now introducing its Secured Overnight Financing Rate (“SOFR”)
SOFR is based upon overnight repurchase agreements secured by US Treasuries, characterized as a near riskless rate
Daily underlying transaction value of such agreements has exceeded $500 billion in recent years (and has recently exceeded $800 billion).

11. How will the new index be determined?
SOFR is determined by the NY Fed based upon actual US Treasury overnight repurchase transactions
Data will be reported to the NY Fed directly by clearing agencies (The Bank of New York Mellon and DTCC) and will include both tri-lateral and bilateral components
The NY Fed will daily determine and publish several SOFR components as well as SOFR
Daily publication around 8:30 a.m. based on prior day’s trading is anticipated

12. When will the new index be introduced and usable?
Publication of SOFR began last Tuesday (4/3/18)
Pro forma historical rates for the period from August 2014 through October have also been made available
The NY Fed press release states that pro forma historical rates for the interim period will be made available “shortly”, so that a four year history (from which 30-, 60- and 90-day rolling averages could be derived) should be available by Labor Day 2018.
“apps.newyorkfed.org/en/markets/autorates/sofr”
2018 End
Trading begins in futures and/or bilateral uncleared OIS referencing SOFR
2020 Q1
CCPs allow choice in clearing swap contracts that use SOFR for PAI and discounting
2021 End
Term reference rate based on SOFR-derivatives once sufficient liquidity
2019 Q1
Trading in cleared OIS that reference SOFR
2021 Q1
CCPs no longer accept new swaps for clearing if no SOFR discounting and PAI, unless closing out legacy contracts

13. Related Federal Tax Issues
How does this interact with federal tax issues? What is the outlook for guidance on reissuance? What is the outlook for private activity bonds?

14. Questions or Comments? Michela Daliana Hawkins Delafield & Wood LLP
(212)
Kenneth B. Roberts Hawkins Delafield & Wood LLP (212)
Joseph A. Santoro
Bank of America Merrill Lynch
(646)