Financial Stability Oversight Council
Friday, June 11, 2021
Randal Quarles, Vice Chairman, Board of Governors of the Federal Reserve System
Vice Chairman Quarles discussed the London Interbank Offered Rate (LIBOR) transition, adding that some market participants are procrastinating their transition from the benchmark and emphasized that LIBOR is over. He referenced the Federal Reserve’s supervisory letter stating that the use of LIBOR in new contracts after 2021 would create safety and soundness concerns and that the U.S. Dollar LIBOR quotes available from January 2022-2023 will only be for legacy contracts. Quarles stated that there is no path forward for LIBOR after the end of this year and that the Alternative Reference Rates Committee (ARRC) has indicated it will soon be able to recommend term rates for the Secured Overnight Financing Rate (SOFR). He welcomed Congress’ legislative efforts to provide a legacy contract fallback where necessary and highlighted the need to be confident that we will emerge from the LIBOR transition with a stable financial system and that ARRC chose SOFR for that reason. He stated that there will be a term rate based on SOFR within weeks supporting a range of market problems and that market participants should not expect LIBOR rates to be widely available. Quarles concluded by stating that there is no reason for any firm to delay the transfer to SOFR in line with the ARRC’s recommendations.
Janet Yellen, Secretary, U.S. Department of Treasury
Secretary Yellen opened her remarks by discussing how the early stages of the pandemic highlighted the structural vulnerabilities of money market mutual funds (MMFs) and their impact on market instability. She added that Securities and Exchange Commission (SEC) staff briefed the Council on options to address issues with MMFs. Following Quarles’ comments, Yellen explained how SOFR provides a robust rate suitable for most products and presents underlying transaction volumes that are unmatched by other LIBOR alternatives. She mentioned the ARRC’s work to draft contractual fallbacks to alternative rates, facilitate the development of SOFR derivatives markets, develop conventions for the use of SOFR across asset classes, and propose legislation addressing legacy contracts. She added that while important progress is being made in some segments of the market, other segments, including business loans, are behind in the transition, and she expressed concern about the use of alternative rates in derivatives where the volume of derivatives contracts referencing these alternative rates could quickly outnumber the transaction volumes underlying the reference rate, leaving it vulnerable to manipulation and disruption. Yellen encouraged market participants to support the switch in derivatives from LIBOR to SOFR this summer and added that action by market participants now will allow the ARRC to recommend a term SOFR rate soon.
Jerome Powell, Chairman, Board of Governors of the Federal Reserve System
Chairman Powell began by discussing MMF issues during the pandemic, the Federal Reserve’s MMF liquidity facility, and the opportunity now available to consider appropriate MMF reforms. He then offered support for Quarles’ LIBOR statement and added that LIBOR transition planning by market participants needs to accelerate. He emphasized that to meet the year-end deadline, we need to work together and that there is no longer an excuse for procrastination in the transition.
Gary Gensler, Chairman, Securities and Exchange Commission
Chairman Gensler began by discussing issues with the MMF market and how the SEC sought to address structural issues in MMFs in reforms adopted in 2010 and 2014. He added that he directed SEC staff to look at these issues in coordination with other agencies and draft possible solutions. He discussed the LIBOR transition, specifically referencing the inverted nature of unsecured term loans’ market size relative to underlying transactions. Gensler expressed several concerns about a number of commercial banks’ advocacy for replacing LIBOR with the Bloomberg Short-Term Bank Yield Index (BSBY), which he described as having many of the same flaws as LIBOR, including the same inverted-pyramid problem. He added that markets underpinning BSBY are weak in good times and virtually disappear during a crisis and that BSBY is not especially robust. He concluded that a first glance, BSBY might seem like an improvement over LIBOR but that it represents the same risk to financial stability and resiliency as LIBOR.
Rostin Behnam, Acting Chairman, Commodity Futures Trading Commission
Acting Chairman Behnam stated that, as a market regulator, it is indefensible to stand by and let market participants adhere to LIBOR and that the days of LIBOR are limited. He added that the LIBOR transition is key to safeguarding the stability of the financial system. After providing a history of LIBOR’s flaws, Behnam explained a few efforts around the transition including his creation of the market risk advisory committee within the Commodity Futures Trading Commission (CFTC) to focus on benchmark reform and establishment of the advisory committee’s subcommittee to address the transition to SOFR. He finished by stating that we must rely on a benchmark that is both representative of transactions and proportional to the depth and breadth of the products that rely upon it, concluding that SOFR demonstrates that fitness for the derivatives markets.
Jelena McWilliams, Chair, Federal Deposit Insurance Corporation
Chairwoman McWilliams stated that Federal Deposit Insurance Corporation (FDIC) supervised institutions are on track to meet their transition timeline goals. She added that FDIC does not endorse any particular alternative reference rate and is focused on the selection of a replacement rate, fallback language for legacy contracts, technology for processing a new benchmark rate, customer communication, and consumer protection.
Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency
Acting Comptroller Hsu stressed the importance of financial stability and described SOFR as a robust replacement rate that has been carefully developed and will be reliably produced in a wide range of market conditions. He added that SOFR will promote financial stability and has broad applicability and a strong track record. He also expressed his expectation that every bank, regardless of size, demonstrate that its replacement rate selections are appropriate for the bank’s products, funding needs, and operational capacities and concluded that it is imperative that banks continue planning for the transition.
Mark Calabria, Director, Federal Housing Finance Agency
Director Calabria began by welcoming and supporting the SEC’s work on MMF issues and emphasized the need to keep government MMFs in mind in the context of the larger MMF discussion. He added that FHFA will continue to address MMF issues in relation to the housing agency debt market and that FHFA has made clear to its regulated entities that LIBOR is going away. He added that Fannie Mae issued the first SOFR-based bet in 2018, Freddie Mac and the federal home loan banks followed, and now the federal home loan banks are the largest users of SOFR-based floating debt.
Todd Harper, Chairman, National Credit Union Administration
Chairman Harper discussed the need to understand the strengths and weaknesses of each of the different kinds of MMFs. He added that the Council’s MMF statement and the SEC’s engagement with stakeholders on MMF issues are important steps toward increasing the stability and resiliency of our system. He added that the National Credit Union Administration’s (NCUA) examiners are closely evaluating the plans of credit unions and that the transition from LIBOR is a supervisory priority for NCUA. Harper closed by expressing support for the work of the Federal Reserve and the ARRC in the transition.
Eric A. Cioppa, Superintendent, Maine Bureau of Insurance
Superintendent Cioppa emphasized the importance of insurance companies transitioning from LIBOR and added that insurance regulators have been monitoring the transition. He stated that insurance regulators have been focused on three areas that may have the most potential impact on the insurance sector and that these include insurance reserving, investments in swaps, and statutory accounting. Cioppa concluded that insurance regulators will continue doing everything to promote the insurance industry’s transition away from LIBOR.
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