Concern over reports that nonfinancial corporations are not, in most cases, being offered alternatives to the soon-to-be-defunct LIBOR reference rate was expressed by leaders of agencies overseeing financial markets in a letter released Monday.
The letter was signed by Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome H. (“Jay”) Powell, Securities and Exchange Commission Chair Gary Gensler, Federal Reserve Bank of New York President and CEO John C. Williams, and Commodity Futures Trading Commission Acting Chairman Rostin Behnam. It followed up on a meeting among them and representatives of nonfinancial corporate stakeholders on the transition away from LIBOR, now scheduled for the end of this year (however, existing contracts will be allowed to use LIBOR until June 30, 2023).
“The transition is at a critical juncture, and we were thus concerned to hear your members report that nonfinancial corporations are, in most cases, not yet being offered such alternatives despite the short amount of time left in the transition,” the leaders wrote. “Accordingly, we invite you to continue to share your experiences and views with us as the transition, and the dialogue with your lenders, continues.”
In April, the nonfinancial corporate stakeholders – represented by Thomas Hunt of the Association for Financial Professionals, Thomas C. Deas, National Association of Corporate Treasurers, and Thom Quaadman, of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness – wrote of their concern that non-financial corporates (NFCs) were challenged to obtain loan agreements based on alternatives to LIBOR, including the Secured Overnight Financing Rate (SOFR) – even after those NFCs had indicated that loan agreements based on SOFR would be their preferred choice.
The group requested a meeting with the federal regulators to express their concerns in person.
(SOFR was developed by a group sponsored by the Federal Reserve the Federal Reserve Bank of New York; the Fed, including Vice Chairman for Supervision Randal Quarles, have said repeatedly that they recommend use of SOFR.)
The regulators noted that the LIBOR transition presents operational, technological, accounting, tax and legal challenges to Main Street companies. “We appreciated hearing your members express their need for sufficient clarity on the alternative rates that will be available to meet their financial needs and for sufficient time to understand how best to use those rates,” the regulators stated. “We also took note of the challenges your members have faced in obtaining loan agreements based on the Secured Overnight Financing Rate (SOFR), even after they indicated that loan agreements based on SOFR would be their preferred choice.
“The official sector has consistently supported a transition from LIBOR that leads to a more stable financial system, while also meeting the needs of all the parties who will be impacted by it, including nonfinancial corporate and noncorporate business borrowers, consumers, and investors, as well as financial institutions,” the letter from the regulators stated. “We have stressed the importance of reference rates built on deep, liquid markets that are not susceptible to manipulation.
“Although the official sector is not positioned to adjudicate the selection of reference rates between banks and their commercial customers, borrower preferences and needs clearly have a significant role to play in the selection of such rates,” the regulators wrote.