Alternative Reference Rates

The financial industry and global regulators recognize the need for a transition from LIBOR to more robust alternative reference rates.

In particular, a July 2014 report by the FSB’s Official Sector Steering Group (OSSG) highlighted the importance of encouraging market participants to have more robust fallback provisions in contracts or financial instruments that reference a benchmark in the event of cessation of the referenced benchmark.

In 2017, the CEO of the UK’s Financial Conduct Authority (FCA), Andrew Bailey, announced that after 2021 the FCA (the regulator of LIBOR) would no longer compel banks to submit LIBOR quotes, raising the possibility that LIBOR may be deemed unrepresentative and/or cease publication after that time. This makes it imperative for financial market participants and end users to prepare for a time when they will not be able to rely on LIBOR as a benchmark.

SIFMA, the U.S. regional member of the Global Financial Markets Association (GFMA), was an early proponent of global reform efforts with the November 2012 publication of its Principles for Financial Benchmarks, and is engaged with and supportive of efforts by global regulatory bodies related to market standards and principles for benchmarks.

In June 2017, the Federal Reserve’s Alternative Reference Rate Committee (ARRC) selected the Secured Overnight Funding Rate (SOFR) as the rate that, in its consensus view, represents best practice for use in certain new U.S. dollar derivatives and other financial contracts. SOFR is based on the overnight repo markets, moving the reference rate from being based on ~$1 billion transactions per day (the most active tenor of LIBOR, three months) to the repo market with around $1 trillion of transactions per day. Publication of the SOFR rate began in April 2018. Trading and clearing of SOFR-based swaps and futures began in May 2018.

More recently, the ARRC established several product-specific sub-working groups for relevant stakeholders to identify and analyze transitional issues associated with a shift away from U.S. dollar LIBOR. The ARRC has published fallback language for new cash products, operational checklists for firms preparing to transition, and also established goals to develop robust SOFR-based term rates by the end of 2021. In 2018, SIFMA became a member of the ARRC.

SIFMA is committed to working in close cooperation with the industry, U.S. and global regulators, and trade associations and continuing efforts as part of the ARRC relating to important transition issues, including: legacy transactions, implementation of robust fallback provisions, and development of term rates in support of a successful transition to alternative reference rates.

Related Resources: The SOFR Primer, by SIFMA Insights

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