Presented as a “major milestone in the transition away from U.S. dollar (USD) LIBOR,” a formal recommendation of a replacement for the LIBOR rate was made Thursday by the Federal Reserve-backed group that developed the alternative.
According to the Fed’s Alternative Reference Rates Committee (ARRC) (the group sponsored by the Fed that developed the Secured Overnight Financing Rate [SOFR] as an alternative to U.S. dollars [USD] LIBOR [London Interbank Offered Rate]), the formal recommendation follows a “key change” in interdealer trading conventions that were adopted just days ago (July 26). That change outlined loan conventions and use cases for how best to use the SOFR.
According to Federal Reserve Board Vice Chair for Supervision Randal Quarles, the formal recommendation essentially greases the wheels for firms to start using SOFR and abandon LIBOR (which will no longer be used for new contracts beginning Jan. 1, 2021, and will be discontinued for existing contracts after June 30, 2023).
“With this step, market participants now have every tool they need to transition from LIBOR,” said Quarles in a release from the ARRC. “All firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”
According to the ARRC, Thursday’s action concludes its “Paced Transition Plan,” and the transition from LIBOR to the new rate is now in its “homestretch.”