(Oct. 15, 2021) It’s “time to move” from LIBOR now by slowing the use of the reference rate by year’s end to foster a smooth completion of the rate’s overall use, according to a Federal Reserve-sponsored group that has developed an alternative rate.
LIBOR – the London Interbank Offered Rate – is used widely in derivative contracts, and other financial vehicles, as a reference rate. It is also used by many financial institutions as a reference rate for adjustable rate mortgages and student loans (particularly among credit unions).
However, the rate is being discontinued for new contracts after Dec. 31 (and completely defunct for existing contracts after June 30, 2023). “As a result, USD LIBOR’s liquidity and usefulness will likely diminish as new use comes to an end,” the Alternative Reference Rate Committee (ARRC) stated in a press release this week.
NCUA and the federal banking agencies have issued supervisory guidance to credit unions and banks reminding them that LIBOR will be discontinued after year’s end, and that the institutions should take steps to find alternative rates. ARRC said its recommendation is consistent with steps that “it understands a number of firms are already taking to significantly slow new USD LIBOR activity ahead of year-end in order to ensure that they will be in a position to meet the supervisory guidance.”
ARRC has recommended, as an alternative, the Secured Overnight Financing Rate (SOFR), which the group helped to develop. The Federal Reserve has recommended that firms switch to SOFR for such items as derivative contracts but has made no such recommendation for specific use of SOFR for loans (NCUA and the other banking agencies have likewise made no specific recommendation).