The hardwired fallback language for syndicated and bilateral business loans that reference U.S. dollar (USD) London Interbank Offered Rate (LIBOR) has been supplemented by the Federal Reserve committee for establishing alternative reference rates, the committee said Thursday.
According to the Federal Reserve Bank of New York’s Alternative Reference Rate Committee (ARRC), the supplemental recommendation provides simplified versions of the more elaborate fallback language offered in 2020 recommendations. “Market participants may now use either the original 2020 or simplified 2021 language as they see fit and can be confident in the fact both versions lead to the same outcome at transition,” the ARRC said in a release.
The committee said the recommendation was made in the wake of recent announcements about LIBOR’s scheduled cessation in mid-year 2023. On Wednesday, the ARRC said it “will not be in a position” to recommend a forward-looking rate by the middle of this year via its Secured Overnight Financing Rate (SOFR), adding it also encourages market participants to continue to transition from LIBOR by employing the tools currently available.
On Monday, the ARRC recommended that movement away from LIBOR needs to “materially escalate,” noting some groups are still using LIBOR as their reference rate for a variety of loans and other financial instruments. Also Monday, Federal Reserve Vice Chairman for Supervision Randal Quarles said there is “no scenario” under which LIBOR will continue past its phase-out period that ends in June 2023.