Market participants must renegotiate and amend existing contracts to move away from a now-defunct reference interest rate – or incorporate “robust fallback language,” the head of the group that developed an alternative rate wrote Thursday.
In an op-ed that appeared in the Feb. 3 issue of the business weekly newspaper Barron’s, Tom Wipf, chairman of the Federal Reserve-sponsored Alternative Reference Rate Committee (ARRC), wrote that while the London Interbank Offered Rate (LIBOR) is now defunct, his group will now work on “ensuring market participants manage the risk of outstanding contracts that reference LIBOR.”
LIBOR officially ended Dec. 31. However, existing contracts using LIBOR remain in force but no later than June 30, 2023. The ARRC has developed an alternative rate – the Secured Overnight Financing Rate (SOFR) – to replace LIBOR. However, Wipf is essentially urging those relying on LIBOR in existing contracts to move away from the discontinued rate.
In particular, he wrote, “robust fallback language” should contemplate a permanent end to LIBOR, such as the ARRC’s own recommended fallback language.
He also wrote that for those legacy contracts that cannot be amended, legislation is critical to “significantly reduce operational and legal risks for many market participants and help them seamlessly transition to SOFR.”
Wipf also said that the ARRC will remain active through this year to help the industry to solve “any remaining challenges with the transition and encourage market participants to continue their adoption of SOFR.”