Publication notes alternatives coming to LIBOR – which is likely unavailable after 2021

Transitions in financial instrument reference rates – such as from the widely used London Inter-bank Offered Rate (LIBOR) to other and newly developed reference rates – are outlined in the latest edition of Supervisory Insights published by the federal insurer of bank deposits.

The winter edition of the publication, published by the Federal Deposit Insurance Corp.’s (FDIC) division of risk management supervision, notes that several alternative reference rates have emerged for LIBOR. That’s important, the report indicates, because the LIBOR may not be available to financial institutions after 2021.

Among the alternatives, the publication notes, is the Secured Overnight Financing Rate (SOFR), which the publication points out is primarily for dollar-denominated derivative products. “SOFR is quite different from LIBOR as it is based on actual overnight secured transactions that could vary significantly from LIBOR under some market conditions.”

The report notes that the developer of the SOFR, the Alternative Reference Rate Committee (ARRC, established by the Federal Reserve Bank of New York, and which includes FDIC as an ex officio member) is also creating a term rate.

Other alternatives include, the publication notes, reference rates created by international groups for use with other countries and non-US dollar related currencies, including:

  • the United Kingdom reformed Sterling Overnight Index Average (SONIA);
  • the Swiss National Working Group Swiss Average Rate Overnight (SARON); and
  • the Japanese unsecured overnight call.

“At this point, it appears that LIBOR will likely be around for at least several more years. FDIC examiners will not be examining financial institutions for LIBOR planning or criticize risk management of loans or deposits merely because they use LIBOR as a reference rate,” the report notes. “The FDIC will provide additional awareness materials to the industry as appropriate. Institutions should feel free to discuss any concerns they may have about the potential transition with their primary federal regulator.”

Winter 2018 Issue, Supervisory Insights

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