(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).
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(April 9, 2021) Approximately $1.5 million in awards to support digital services and cybersecurity, mentoring of small minority depository institution (MDI) credit unions, and service to underserved communities will be available to low-income-designated credit unions during 2021, NCUA said this week. The awards are made available through the Community Development Revolving Loan Fund (CDRLF); applications are accepted from federally insured credit unions that have the agency’s “low-income” designation. Non-federally insured, state-chartered credit unions may also apply; these institutions will have to complete additional application forms and agree to be examined by the NCUA to receive the funds, the agency said … New York has adopted a law creating clarity for the issue of legacy LIBOR-based contractsthat mature after mid-2023 and do not have effective fallbacks. Most LIBOR-based contracts expire before June 2023 (and the use of the reference rate is generally prohibited after the end of this year). However, there are some legacy contracts that are set to continue past the mid-year 2023 deadline – and nearly all of those, according to the Federal Reserve Bank of New York’s Alterative Reference Rate Committee (ARRC) are written under by New York law. The new measure requires the legacy contracts to adopt an alternative rate (such as the ARRC’s Secured Overnight Financing Rate (SOFR)) – or face the contracts being declared void.
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Community Development Revolving Loan Fund Access for Credit Unions (Federal Register)
ARRC Endorses Decision to Sign New York State LIBOR Legislation into Law
(March 26, 2021) The Federal Reserve’s top supervisor this week made it clear that the future of LIBOR as a reference rate for such products as adjustable-rate mortgages will be sealed after June 2023.
In remarks this week to a symposium on reference rates sponsored by the Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC), Federal Reserve Board Vice Chair for Supervision Randal Quarles said recent statements about the discontinuation of the London Interbank Offer Rate (LIBOR) are definitive. “There is no scenario” in which LIBOR (London Interbank Offer Rate) will continue past mid-year 2023, when U.S. dollar (USD) LIBOR will no longer be published, Quarles said.
The group that publishes LIBOR has already announced that it can no longer guarantee the rate after the end of this year. (The June 2023 date refers to outstanding contracts that use the rate; after that date, the administrator of LIBOR – the ICW Benchmark Administration (IBA) has said it will no longer publish overnight, one-month, three-month, six-month, or one-year USD LIBOR).
Additionally, the federal banking regulators in November issued guidance to their supervised entities that, after the end of this year, “continued use of LIBOR in new contracts would create safety and soundness risks, and we will examine bank practices accordingly.” NCUA has not issued similar guidance, although it did join an FFIEC statement last summer urging financial institutions to continue their efforts to transition to alternative reference rates. In addition, the agency’s 2021 “supervisory priorities” note the agency continues to encourage credit unions to prepare for LIBOR’s demise by year’s end.
Also this week, the New York state legislature passed legislation that is aimed at minimizing legal uncertainty and adverse economic effects for LIBOR contracts, a side effect of the discontinuation of the reference rate. According to the ARRC, the legislation affects LIBOR contracts that mature after June 2023, including those that have no effective means to replace LIBOR upon its cessation. The legislation is significant to the phase-out of LIBOR since New York law governs many of the financial products and agreements referencing LIBOR, according to the ARRC.