The U.K.-based Financial Conduct Authority today announced that the London Interbank Offer Rate, or Libor, will continue to be supported by reporting banks until the end of 2021, but that work must begin in earnest to plan the transition to alternative reference rates that are based firmly on transactions. The FCA noted that while there have been significant improvements to Libor in recent years, the absence of active underlying markets have raised serious questions about its sustainability.
The U.S.-based Alternative Reference Rate Committee — a group of private-market participants convened by the Federal Reserve — last month recommended a broad Treasuries repo financing rate as a preferred alternative to Libor. The notional volume of outstanding loans, derivatives and other financial products indexed to U.S. dollar Libor is estimated to be more than $160 trillion. As such, a paced transition to an alternative to Libor is important. The ARRC will refine its proposed transition plans and develop implementation options for its recommended rate in consultation with interested parties.
The American Bankers Association has engaged with the ARRC regarding implementation considerations for alternatives to Libor including in the context of commercial loans. The committee is expected to host roundtables in the fall regarding implementation considerations. ABA continues to engage members on reference rate transition issues with respect to commercial lending obligations. While the effects of a phased transition from Libor on legacy contracts are still being explored, bankers are advised to begin loan document due diligence for these loans. For more information, contact ABA’s Barry Mills.