Momentum growing for abandonment of LIBOR

The forward motion to officially sideline LIBOR (London Interbank Offering Rate) as a reference rate for such financial products as adjustable mortgages and others continued this week with two top players in the mortgage market taking action.

Banking behemoth JP Morgan Chase unveiled a mortgage based on the new (and Federal Reserve-backed) Secured Overnight Financing Rate (SOFR), an alternative to LIBOR which is scheduled to be completely phased out by the end of next year. Meanwhile, secondary mortgage market giant Fannie Mae issued its first security backed by adjustable rate mortgages that use SOFR as a reference.

Also last week, the Financial Stability Board (FSB, an international group of central bankers and national regulators, which is chaired by Federal Reserve Board Vice Chair for Supervision Randal Quarles) unveiled a “global transition roadmap,” which sets out a timetable for a smooth transition away from LIBOR by year-end 2021. The FSB said the roadmap is intended to inform those with exposure to LIBOR benchmarks of steps they should take now through year-end 2021 to successfully mitigate these risks. “These are considered prudent steps to take to ensure an orderly transition by end-2021 and are intended to supplement existing timelines/milestones from industry working groups and regulators,” the group said.

Clearinghouses this month (and as recently as last week) have already begun making the switch from LIBOR to SOFR or other alternative rates, largely because of the impact on banks trading U.S. derivatives. The change affects trillions of dollars’ worth of transactions.

Last month, the Treasury’s Office of Financial Research (OFR) announced a new data tool focusing on repo data. According to OFR, the collection of repo data is expected to provide “a permanent and expanded source of data to support SOFR and reference rate transition.”

OFR Begins Publishing Repo Data, Unveils Short-term Funding Monitor

FSB publishes global transition roadmap for LIBOR