Since 2017, the Financial Conduct Authority (FCA) – the United Kingdom-based regulator of LIBOR – has been warning market participants that it will stop compelling panel banks to submit LIBOR quotes beginning in 2022, which could result in the declaration that LIBOR is no longer representative of market activity.
On March 5, 2021, the FCA announced that the publication of 1-week and 2-week U.S. dollar LIBOR will cease after December 2, 2021, and the publication of all other U.S. dollar LIBOR settings will cease or be deemed unrepresentative of market activity after June 30, 2023.
The Federal Housing and Finance Agency (FHFA) established by the Federal Reserve Board and New York Federal Reserve Bank will facilitate the transition away from LIBOR to the Secured Overnight Financing Rate (SOFR). The rate has been selected by the Alternative Reference Rates Committee (ARRC) as a more robust transaction-based replacement for LIBOR in the U.S. Fannie Ma, Freddie Mac, and FHLBanks all serve as members of the ARRC.
The FHFA worked with Fannie Mae and Freddie Mac to set the parameters for a SOFR-based adjustable rate mortgage (ARM) and develop a more robust “fallback language” that describe how a replacement rate would be selected in the event of cessation of an ARM’s reference rate.
“This formal recommendation of SOFR Term Rates is an achievement for the USD LIBOR transition specifically and for financial stability overall. This concludes the ARRC’s Paced Transition Plan and market participants now have all the tools they need as we enter the transition’s homestretch,” said Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley. “With just five months until no new LIBOR, significant work remains and I urge everyone with LIBOR exposures to immediately take action and base their new contracts on forms of SOFR.”
“We are seeing great momentum in the transition toward SOFR and today’s recommendation will undoubtedly accelerate that progress,” said John C. Williams, president of the Federal Reserve Bank of New York and co-chair of the financial stability board’s official sector steering group. “Keep in mind: the end of 2021 and of new LIBOR is coming quickly, so take action now to build a solid SOFR foundation and ensure you are ready.”
