LIBOR: Stop Digging!

June 13, 2019 - On June 3rd, Fed Vice-Chair of Supervision and FSB Chairman, Randal Quarles, opened the ARRC Roundtable with a direct message to anyone questioning the LIBOR transition: “[T]he regulator of LIBOR has said that it is a matter of how LIBOR will end rather than if it will end, and it is hard to see how one could be clearer than that.” If that is the case, then what should market participants do? ARRC Chairman, Tom Wipf, explained it best – the best way out of a hole is to stop digging it! Notwithstanding the considerable operationalization required to originate SOFR loans, the origination of SOFR assets is not only the best way to transition away from LIBOR, but it is also mission critical to developing a term SOFR reference rate. This was a point highlighted by speakers, including the LSTA, at a recent U.S. Chamber of Commerce event on LIBOR transition in DC.

Moving away from LIBOR by the end of 2021 is a tall order, but it is important to note that market participants are not without resources. At the ARRC Roundtable, David Bowman clearly outlined how averages of SOFR can – and are - being used by cash market participants now. (For more information, review the ARRC’s User’s Guide to SOFR and the LSTA’s FAQs.) The Fed has also published indicative forward-looking Term SOFR and compounded SOFR data ahead of the averages the Fed has indicated they would begin publishing next year. LSTA’s Meredith Coffey has helpfully charted the data in this Demystifying SOFR factsheet. Market participants becoming familiar with how SOFR looks and behaves is an important step in the transition.

While the Fed and the ARRC’s message is clear - market participants should not wait for a term reference rate before transitioning to SOFR – a significant infrastructure buildout is needed to accommodate certain of the variants of SOFR. While that process unfolds, LIBOR credit agreements will continue to be executed. It is imperative that these agreements (and other cash products) include safer fallback language as explained by the LSTA and other panelists in a dedicated session at the ARRC Roundtable. Hopefully, the ARRC fallback language recommendations for syndicated loans, floating rate notes, and now for bilateral loans and securitizations, will help market participants do so.

To keep current on the LIBOR transition, please refer to both the ARRC website and LSTA website.  We also recommend that members sign up for ARRC email alerts.

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