The Libor Transition: Protecting Consumers and Investors
Summary
This Statement for the Record was submitted to the U.S. Senate Committee on Banking, Housing, and Urban Affairs for a hearing entitled, The Libor Transition: Protecting Consumers and Investors.
Excerpt
Statement for the Record by the Securities Industry and Financial Markets Association (SIFMA)
U.S. Senate Committee on Banking, Housing, and Urban Affairs
The Libor Transition: Protecting Consumers and Investors
November 2, 2021
Chairman Brown, Ranking Member Toomey:
The Securities Industry and Financial Markets Association (SIFMA) submits this statement for the record for the hearing titled “The Libor Transition: Protecting Consumers and Investors.” We thank you for convening this important hearing and applaud your leadership for making the transition from LIBOR to alternative reference rates a priority for the committee.
Summary
SIFMA believes federal legislation is necessary to facilitate a smooth transition away from LIBOR for “tough legacy” contracts to an alternative reference rate. There are currently trillions of dollars of existing contracts and instruments that, as a practical matter, cannot be amended to utilize an alternative rate. SIFMA is supportive of federal legislation aligned with recommendations from the Alternative Reference Rates Committee (“ARRC”) to address these situations where contracts cannot be easily transitioned from LIBOR due to legal or regulatory reasons. We believe such legislation would benefit all market participants including LIBOR’s end users, who range from investors to companies to consumers. The legislation would provide four key benefits: (1) certainty of outcomes; (2) fairness and equality of outcomes; (3) avoidance of years of paralyzing litigation; and (4) preservation of liquidity and market resilience.
Our testimony today will provide background on the LIBOR transition, why it is needed, what has been done, and why we believe federal legislation is appropriate and needed.
We look forward to continuing to work with the Committee on this important issue and to move this legislation forward.
Background on LIBOR and the Need for Transition
LIBOR is referenced by approximately $223 trillion of financial products. Today’s LIBOR is informed primarily (and sometimes entirely) by “expert judgement” from estimates of transactions, not actual transactions. As a result, LIBOR doesn’t necessarily reflect the true cost of bank funding and is vulnerable to volatility and manipulation.