The transition from London Interbank Offered Rate (LIBOR) to alternative reference rates (ARR) is well underway. Financial services companies are working to update technology platforms and products to reflect discounting and accruals using these new ARRs in time for the cessation date determined for each LIBOR tenor. Currently the target date for cessation is December 31, 2021, but in a paper titled Statement on IBOR Transition dated November 30, 2020 the Federal Reserve Board (FRB) discussed the ICE Benchmark Administration’s (IBA) consultation on potentially extending certain LIBOR tenors to June 30, 2023. It should be noted however, they cautioned entering in new contracts that use USD LIBOR after December 31, 2021 as it would create safety and soundness risk.
In the US, the FRB and Alternative Reference Rate Committee (ARRC) members have championed the Secured Overnight Funding Rate (SOFR) as the replacement for U.S. Dollar LIBOR. Since its recommendation, a few milestones related to SOFR implementation have been accomplished, but there is much debate as to whether SOFR is up to the task as a replacement for all of LIBOR’s uses. Although imperfect, LIBOR has proven to be quite useful in a variety of financial products and applications, which is where the challenge begins in selecting a suitable or universal replacement rate.