April 11, 2019 - SOFR, the proposed replacement to U.S. dollar LIBOR, turned one this month. The consensus is that remarkable progress has occurred in the past year – but even more needs to happen in the next two and a half years. Why? Because that is when LIBOR may end. We recap ongoing SOFR efforts discussed in Federal Reserve comments, a hot-off-the-presses BlackRock Viewpoint and the LSTA Operations Conference.
First, on Wednesday, Randall Quarles, Federal Reserve Vice Chairman of Supervision and Financial Stability Board head, noted that, since the release of SOFR last April, there has been more than $81 billion of SOFR-linked issuances and $7 trillion of notional volume of SOFR futures. But banks need to do more to transition from LIBOR – and the Fed is watching their progress. The Federal Reserve’s supervisory teams are including LIBOR transition in their bank monitoring and expect to see the appropriate level of preparedness at the banks they supervise, Quarles noted.
BlackRock, meanwhile, shared their 2019 LIBOR to-do list: 1) Figure out LIBOR-SOFR spread adjustments, 2) Determine whether or not forward looking term SOFR rates are workable, and 3) Establish the correct pre-cessation triggers (to convert from LIBOR to SOFR). In addition, they warn that getting fallback language right (and in documents) is key and reiterate that global coordination and, to the greatest extent possible, consistency across asset classes is critical.
The LSTA tackled these issues from a 30,000 foot and an in-the-weeds level at the LSTA Operations Conference on Tuesday. On the high side, we discussed 5 key steps to leaving your LIBOR: 1) Know your exposures, 2) Understand your replacement rates, 3) Develop workable fallbacks, 4) Operationalize all variants of SOFR, and 5) Begin to issue SOFR-based loans. Then we went weedy, discussing exactly what sorts of SOFRs are on the table (Forward Looking Term SOFR, SOFR Compounded in Advance, SOFR Compounded in Arrears and Daily Simple SOFR), what it takes to operationalize each SOFR, and how loan conventions may need to change.
The LSTA is a member of the Alternative Reference Rates Committee (ARRC), co-chairs the ARRC Business Loans Working Group (BLWG), and runs the BLWG Operations Subgroup. For more information, contact mcoffey@lsta.org, tvirmani@lsta.org or ehefferan@lsta.org.
