SEC Calls for Orderly Transition Away From LIBOR

The U.S. Securities and Exchange Commission (SEC) has called on market participants to “proactively manage their transition” away from the London Interbank Offered Rate (LIBOR), which is set to expire in 2021.

 

The SEC noted that the discontinuation of LIBOR could present a material risk for public companies, investment advisers, investment companies, and broker-dealers. The risk could metastasize if an orderly transition to an alternative reference rate is not completed in a timely manner, the SEC added. 

 

“The SEC will continue to monitor disclosure and risk management efforts related to the LIBOR transition, and we welcome engagement from market participants on these important matters,” said SEC Chairman Jay Clayton.

 

Last week, the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed, issued a report highlighting the potential of the Secured Overnight Financing Rate (SOFR) to replace LIBOR, which is used as the base rate for adjustable-rate commercial and multifamily mortgages totaling more than $1 trillion. The ARRC developed what it calls a “Paced Transition Plan” to facilitate the switchover, along with recommendations to encourage the financial services industry’s adoption of SOFR, which the ARRC first proposed in 2017.

 

In June, the Mortgage Bankers Association’s (MBA) LIBOR Outreach Committee found 92 percent of the commercial and multifamily mortgage lenders it polled have already begun planning for the transition away from LIBOR, with 77 percent already including adjusted LIBOR fallback language in all new loan documents. But only 56 percent of respondents polled by the MBA said they were on track in preparing for a future without LIBOR and only 41 percent said they might use SOFR as the replacement for LIBOR.

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