Action on fallback recommendations for 1-year, 2-month contracts signals ‘end is upon us’ for LIBOR

Signaling the final countdown to the end of the soon-to-be-defunct LIBOR reference rate, fallback recommendations for 1-week and 2-month USD LIBOR contracts using a Federal Reserve-developed alternative were released Friday, designed to meet statutory requirements in New York and Alabama.

According to the Alternative Reference Rates Committee (ARRC), the group created by the Federal Reserve Board and the New York Federal Reserve Bank to develop an alternative to the soon-to-be-defunct LIBOR reference rate, the fallback recommendations are intended to meet requirements under New York and Alabama laws to select and recommend forms of the LIBOR alternative, the Secured Overnight Financing Rate (SOFR).

In addition to associated spread adjustments and conforming changes, the ARRC said, the recommendations are designed to replace references to 1-week and 2-month USD LIBOR in certain contracts affected by the states’ LIBOR legislation.

LIBOR will no longer be published after Dec. 31, the ARRC noted. SOFR is the recommended rate under the states’ LIBOR legislation.

The ARRC indicated that the release of the recommendations is essentially the beginning of the end of LIBOR as a reference rate in the U.S. The group did point that references to 1-week and 2-month USD LIBOR are uncommon. The ARRC recommendations, the group said, apply only to the narrow set of LIBOR-based contracts that are affected by the states’ LIBOR legislation, “generally contracts with no fallbacks or fallbacks that reference LIBOR,” ARRC said.

For contracts with fallbacks that give a party (such as the lender or noteholder) discretion to choose a replacement rate, the state LIBOR legislation also provides a safe-harbor if that party chooses the SOFR-based rate and conforming changes recommended by the ARRC. The group said its recommendation lays out an approach for a breadth of products, including asset-backed securities, business loans, consumer products, floating rate notes, and more.

“The end is upon us, with just one month until no new LIBOR and the cessation of these two USD LIBOR tenors,” said Tom Wipf, ARRC chairman, in a statement released by ARRC. “LIBOR’s endgame has been clear for a long time, and today’s recommendations are important for the legacy contracts that rely on those tenors.

“With all of the key tools laid out, it is critical that market participants act now to ensure a smooth transition,” he added.

Statement of the Alternative Reference Rates Committee
as the “Relevant Recommending Body” under State LIBOR Legislation with respect to 1-week and 2-month USD LIBOR tenors