Transitioning from LIBOR – the widely used but soon-to-be defunct benchmark interest rate banks use to lend to one another, and which also serves as the reference rate for loans to consumers for such products as adjustable mortgages – to another benchmark rate is outlined in a “global transition roadmap” released by the Financial Stability Board (FSB) Friday.
According to the FSB (an international group of central bankers and national regulators, which is chaired by Federal Reserve Vice Chair for Supervision Randal Quarles), the roadmap sets out a timetable for a smooth transition away from LIBOR (London Interbank Offered Rate) by year-end 2021. The benchmark is being phased out because the transactions it is based on don’t occur as often as they did in prior years. As a result, the financial regulator in the United Kingdom has announced that it cannot guarantee the rate’s availability beyond 2021.
“Use of LIBOR in the five LIBOR currencies (the U.S. dollar, Great Britain dound, European Union euro, Japan yen and the Swiss Confederation franc) is widespread internationally,” the FSB said in a release. ”Transition away from LIBOR by end-2021 requires significant commitment and sustained effort from both financial and non-financial institutions across many LIBOR and non-LIBOR jurisdictions.”
The FSB said the roadmap is intended to inform those with exposure to LIBOR benchmarks of steps they should take now through year-end 2021 to successfully mitigate these risks. “These are considered prudent steps to take to ensure an orderly transition by end-2021 and are intended to supplement existing timelines/milestones from industry working groups and regulators,” the group said.
Clearinghouses this month (and as recently as today) have already begun making the switch from LIBOR to alternative rates, including the Secured Overnight Financing Rate (SOFR, which is favored by the Fed), largely because of the impact on banks trading U.S. derivatives. The change affects trillions of dollars’ worth of transactions.
FSB said steps in its roadmap include:
- By the end of 2020, firms should be in a position to offer non-LIBOR linked loans to their customers.
- By mid-2021, firms should have established formalized plans to amend legacy contracts where possible and implemented the necessary system and process changes to enable transition to robust alternative rates.
- By end-2021, firms should be prepared for LIBOR to cease.