Dive Brief:
- A panel of banks, insurers and asset managers backed by the Federal Reserve cautioned against market disruption and called on companies to quicken the phaseout of the London Interbank Offered Rate (LIBOR) before the official end of the reference rate on Dec. 31.
- The Alternative Reference Rates Committee (ARRC) “recommends that all market participants act now to slow their use of U.S. dollar (USD) LIBOR and leverage the next six weeks as a key window to reduce such activity to promote a smooth end to new LIBOR contracts by the end of the year,” the panel said Thursday in a statement.
- “Taking a proactive approach over a period of time — rather than at a defined end point under which prevailing liquidity conditions could have an outsized impact — is in the interest of market participants seeking to end new use of USD LIBOR and to support smooth market functioning."
Dive Insight:
The Fed and Securities and Exchange Commission (SEC) in recent weeks have warned corporate treasurers and financial institutions to avert market instability by speeding up the switch from LIBOR to the Secured Overnight Financing Rate (SOFR), the reference rate favored by ARRC.
Regulators say that LIBOR — the benchmark for more than $200 trillion in business loans, mortgages, derivatives and other financial contracts worldwide — may not be used as the reference rate in new financial contracts after Dec. 31.
Some market instability from the end of LIBOR is possible later this year, SEC Chair Gary Gensler said, warning that regulators will not postpone the Dec. 31 deadline.
“Most of the market adjusts pretty smoothly,” he said last month. In “some it gets choppy because you can’t anticipate everything and some people, frankly, wait for the last time."
Fed Vice Chair Randal Quarles said this month that lenders and corporate borrowers need to speed up the pace of their switch to SOFR, noting that they used LIBOR alternatives for less than 1% of corporate loans and 8% of derivatives during the second quarter.
“Market participants should act now to accelerate their transition away from LIBOR,” Quarles said. “The reign of LIBOR will end imminently, and it will not come back.”
The final fixings for most LIBOR rates — including one-week and two-month U.S. dollar LIBOR — will be made on Dec. 31, 2021, but other U.S. dollar tenors may continue until June 30, 2023.
LIBOR is derived from London banks' estimates of what they would be charged when borrowing from other banks. It has been a cornerstone of financial contracts worldwide for more than three decades. Regulators began considering phasing out LIBOR after a manipulation scandal in 2012.
SOFR is based on overnight repurchase agreements secured by U.S. Treasurys and, unlike LIBOR, does not reflect credit risk.
The market for derivatives linked to SOFR has grown since July, when the ARRC endorsed the benchmark for use in a series of term rates.
The number of open interest SOFR futures contracts hit a record high of 1,008,709 at the end of September, and the average daily volume of contracts traded rose 147% during the month compared with September 2020, according to CME Group, the operator of a derivatives exchange.
“Proactive reductions in new USD LIBOR contracts should apply across markets and across the full range of derivatives and cash products, including but not limited to syndicated and bilateral loans,” the ARRC said.
“All market participants should be ready for the year-end U.S. supervisory guidance deadline,” the committee said. “The ARRC applauds the leadership demonstrated by firms who have such plans already underway and encourages those without such plans to immediately commence efforts to significantly slow their new USD LIBOR activity.”
The ARRC includes representatives from several companies and industry trade organizations such as Bank of America, Citigroup, Deutsche Bank, Fannie Mae, Ford, MetLife, Goldman Sachs, BlackRock, the American Bankers Association and the National Association of Corporate Treasurers.
