The last day of next month, just 30 days away, is the end of the use of a popular interest reference rate, and banks and other firms should be prepared, a Federal Reserve-sponsored group said Wednesday.
Those that aren’t should get on the ball now, the group warned.
In a statement marking the end of the London Interbank Offered Rate (LIBOR), the Alternative Reference Rate Committee (ARRC) urged market participants with LIBOR exposures to complete their transition efforts now, “and to draw upon the numerous resources and tools that have been made available over the past several years to facilitate this.”
The ARRC was created by the Federal Reserve to develop and implement an alternative to the LIBOR, which is completely ceasing operation June 30. The rate was phased out for new contracts – including loans – as of Jan. 1, 2022. Legacy contracts still using the rate after that date have until June 30 to transition to an alternative.
The alternative developed by the ARRC is known as the Secured Overnight Financing Rate (SOFR).
LIBOR is ceasing operations as a reference rate – for products including new and used car loans and student borrowing — because it may no longer be relied upon to reflect current market conditions. SOFR was developed as a market condition-reflective vehicle to be a long-term replacement for LIBOR. According to ARRC, SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities in the repurchase agreement (repo) market.
In its Wednesday statement, ARRC termed the need for an orderly transition from LIBOR as “urgent.” “By now, firms should be fully aware of, and prepared for this fast-approaching deadline,” the group stated. “Those that are not prepared risk significant ramifications, including uncertain and potentially unfavorable outcomes regarding their legacy LIBOR contracts along with operational disruptions. These risks underscore that it is essential that all market participants complete their transition of remaining LIBOR contracts now.”
ARRC identified resources for transitioning away from LIBOR as those including:
- The Depository Trust & Clearing Corp.’s (DTCC) LIBOR Replacement Index Communication Tool, which ARRC said enables smooth communication of LIBOR transition-related rate changes for U.S.-issued securities.
- An ARRC statement which confirms the applicable fallback rates where parties have adopted the ARRC-recommended hardwired fallback language.
- The statement notes where parties have not adopted the ARRC-recommended hardwired fallback language, the ARRC urges counterparties to negotiate appropriate terms in advance of June 30, 2023.
- The ARRC emphasizes that its recommended spread adjustments were intended only for use in legacy LIBOR contracts that fall back to SOFR and that they would not be and are not intended to apply to new contracts.
- The Federal Reserve Board has published regulations that implements the 2021 LIBOR Act, which ARRC said establishes a uniform, nationwide solution for replacing references to U.S. Dollar LIBOR in tough legacy contracts that are governed by U.S. law.
- ARRC has published a “Legacy Playbook” containing a range of information and materials to assist with the remediation of legacy LIBOR contracts.
ARRC Statement on the Last 30 Days before U.S. Dollar LIBOR Panels End