‘Time to move’ from LIBOR, group recommends, by slowing its use before year’s end

Slowing the use of U.S. dollar LIBOR – a reference rate for derivative contracts and some loan interest rates – should begin now to foster a smooth, complete end to the rate’s overall use, a Federal Reserve-sponsored group said Thursday.

The Alternative Reference Rate Committee (ARRC), a group sponsored by the Federal Reserve and Federal Reserve Bank of New York, said all market participants should act to slow the use of LIBOR, the London Interbank Offered Rate. The rate is being discontinued for new contracts after Dec. 31, the ARRC pointed out. “As a result, USD LIBOR’s liquidity and usefulness will likely diminish as new use comes to an end,” the group wrote.

LIBOR is used widely in derivative contracts, and other financial vehicles, as a reference rate. It is also used by many financial institutions as a reference rate for variable-rate mortgages and student loans (particularly among credit unions).

The federal banking agencies have issued supervisory guidance to banks that states LIBOR will be discontinued after year’s end and that the banks should take steps to find alternative rates. ARRC said its recommendation is consistent with steps that “it understands a number of firms are already taking to significantly slow new USD LIBOR activity ahead of year-end in order to ensure that they will be in a position to meet the supervisory guidance.”

The group also asserted that “proactively slowing” new use of LIBOR will support firms’ efforts “to safely meet the supervisory guidance as they enter the final months of the year, during which resource limitations and potential constraints on systems changes and testing may exist due to year-end deadlines.”

“The ARRC believes that taking a proactive approach over a period of time – rather than at a defined end point under which prevailing liquidity conditions could have an outsized impact – is in the interest of market participants seeking to end new use of USD LIBOR and to support smooth market functioning,” the group stated.

The group has recommended, as an alternative, the Secured Overnight Financing Rate (SOFR), which the ARRC helped to develop. The Federal Reserve has recommended that firms switch to SOFR for such items as derivative contracts but has made no such recommendation for specific use of SOFR for loans (the other banking agencies and the National Credit Union Administration [NCUA] have likewise made no recommendation).

“I see this ‘time to move’ recommendation as a reminder that everyone should be proactively slowing USD LIBOR use well ahead of December,” said Tom Wipf, ARRC Chairman and Vice Chairman of Institutional Securities at Morgan Stanley. “The supervisory guidance directed at banks will impact all market participants transacting with them, so everyone should feel the same sense of urgency,” he added.

ARRC Recommends Acting Now to Slow USD LIBOR Use over the Next Six Weeks to be Well-Positioned to Meet Supervisory Guidance by Year-End

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