SIFMA plays a central role among our stakeholders in ensuring market resiliency and preparedness. By laying the foundation to transition away from the use of LIBOR, identifying new risk-free rates (with futures trading now underway), improving our fallbacks in derivatives and new securities transactions, and implementing other elements of the Alternative Reference Rate Committee’s (ARRC) paced transition plan, we are reducing risk in our marketplaces and making our system more resilient.

It is important to remember that existing fallback language didn’t contemplate a permanent cessation of LIBOR, but rather a temporary outage – this is a critical issue and one the ARRC is rightly focused on. With an estimated $350 trillion of financial contracts tied to LIBOR globally, we all need to be preparing for a time when we may be without a LIBOR reference.

82% of the almost $200 trillion in USD #LIBOR tied securities outstanding will mature by the end of 2021, says Sandie O'Connor, Chair of the @NewYorkFed's ARRC and Chief Regulatory Affairs Officer for @jpmorgan w/ @PwC_FinServ https://t.co/lHrAsry2uM

— SIFMA (@SIFMA) June 13, 2018

In a speech last month, New York Fed president and CEO Bill Dudley said, “LIBOR’s potential cessation after 2021 poses a clear risk to financial stability, and prudent risk management means that all of us must prepare for a world without LIBOR.” Further, he noted “Because of the great uncertainty over LIBOR’s future and the risks to financial stability that would likely accompany a disorderly transition to alternative reference rates, we need aggressive action to move to a more durable and resilient benchmark regime.”

You simply cannot argue with that. And I don’t think you can argue with the sense of urgency that it implies.

Awareness of the potential for LIBOR to end after 2021 is growing. The industry is working to identify exposures and prepare for a smooth transition. But, there are several important workstreams in place to move us from awareness to preparedness.

Earlier this year, SIFMA and its Asset Management Group, along with ISDA and several other trade associations in the U.S. and Europe, launched a roadmap and survey to identify and highlight key challenges involved in transitioning financial market contracts and practices from interbank offered rates, or ‘IBORs’, to alternative risk-free rates. Our members are focused on the identification of challenges in making any moves to new reference rates in a manner that protects the liquidity and resiliency of both cash and derivatives markets.

The roadmap, subsequent survey, and report, which will be released soon, provide information and data that will help inform regulators and the market about both these challenges and assist in the process of identifying potential paths forward.

As we embark on this path, we all agree it is crucial to try to strive for consistency across geographical regions, product segments and market participants to both avoid fragmentation in global markets and permit the most effective risk management.

ISDA is leading the development of more robust fallback language for derivatives contracts. This work is essential to minimize the disruption that would occur if an IBOR were permanently discontinued. Their market consultation on the proposed credit spread methodology and term fixing adjustment for derivatives fallbacks will be issued soon. It is critical that market participants understand the new triggers and offer feedback on what will work best for the resiliency of our markets.

Once adopted, the language used in derivatives and the principles that the ARRC develops can help us develop fallback provisions to better manage risk in a consistent way.

$750 billion in daily volume makes SOFR the deepest, highest volume rates market in the world, bar none. By the way? The benchmark didn’t exist until April 3 of this year. Just some perspective. It’s not just going away from something. We are going to something that’s really good.

Sandra O’Connor, Chair of the ARRC and Chief Regulatory Affairs Officer for JPMorgan Chase & Co.

The ARRC has identified the Secured Overnight Financing Rate (SOFR) as the rate that represents best practice for use in certain new U.S. dollar derivatives and other financial contracts. It also published its Paced Transition Plan, with specific steps and timelines designed to encourage adoption of the SOFR. SOFR futures are beginning to trade and liquidity is developing in the SOFR futures market. There is a great deal of focus on how to drive liquidity to higher levels going forward.

These are important foundational elements to help market participants manage SOFR-related risks and begin to set the stage for issuers to reference SOFR in the new issuance.

As we come together as an industry to ensure we are prepared and our markets are resilient, we will all need to take strong steps to achieve our robust priorities going forward. This includes defining consistent triggers for fallbacks, developing credit adjustments, and understanding what is needed to develop strong liquidity and term curves, while taking in to account the distinctions between the cash and derivatives markets. There is much to be done. We need to work collectively and move with a sense of urgency to make our markets more resilient and more prepared to use alternative reference rates.

Randy Snook is the Executive Vice President of Business Policies and Practices at SIFMA

Links

• New York Fed Alternative Reference Rates Committee (ARRC)

• SIFMA Resource Center on Alternative Reference Rates

• IBOR Global Benchmark Survey Transition Roadmap