Support for of an alternative reference rate by banking industry vendors should be started as soon as the end of next month and continue through year’s end, an industry group sponsored by the New York Federal Reserve Bank recommended Thursday.
In a list of best practices – which included a timeline – for adopting an alternative reference rate to the London Interbank Offered Rate (LIBOR), the banking industry-sponsored Alternative Reference Rates Committee (ARRC) stated that the vendor support for the Secured Overnight Financing Rate (SOFR) should be ready by June 30. Business and consumer loan support for the SOFR rate should be ready by Sept. 30 and securitizations by Dec. 31.
“With 20 months left until the potential end to LIBOR, it is important that vendors accelerate their transition efforts,” the ARRC advised. “Recognizing this need, the ARRC is for the first-time providing date-based guidance on the near-term steps it believes vendors should take to achieve a successful transition.”
The LIBOR, which serves as the basis for a number of loans products (including variable-rate mortgages), will not be guaranteed beyond the end of 2021, according to the regulator in the United Kingdom that oversees the panel that sets the rate.
To take LIBOR’s place, the Federal Reserve Bank of New York sponsored the ARRC, a group of what the New York Fed calls private-market participants convened to help ensure a successful transition from USD LIBOR to a more robust reference rate. The ARRC came up with SOFR as a LIBOR alternative. The SOFR is based on transactions in the Treasury repurchase market; it is seen as preferable to USD LIBOR since it is based on data from observable transactions rather than on estimated borrowing rates (sometimes the case with LIBOR).
More specifically regarding vendor support readiness for SOFR, the ARRC stated that third-party technology and operations vendors relevant to the transition away from LIBOR – “importantly, those with related upstream and downstream systems (e.g., those for booking, valuation and accounting)“ – should complete all necessary enhancements to support SOFR by the end of this year.
The ARRC also said it continues to discuss additional recommended best practices for other market participants. Those will be forthcoming, the group said.
The Federal Reserve has urged banks and their supporting vendors to accelerate the transition away from LIBOR (and, specifically, to SOFR) to meet the likely discontinuation of the former rate by the end of next year. Last fall, the Consumer Financial Protection Bureau (CFPB) published a “what you need to know” blog posting outlining the impact of the transition from one rate to another. Among other things, the agency said that there is an estimated $1.3 trillion in consumer loans with an interest rate based on LIBOR, the bulk which are for residential mortgages.