Financial firms that have not started their work to transition from the London Interbank Offered Rate and making fallback plans for contracts—especially loans—that currently reference it need to begin right away, the Basel, Switzerland-based Financial Stability Board said in a progress report today on the reference rate transition. Financial institutions “should expect increasing scrutiny” from national regulators as the end of 2021—the date after which Libor is no longer guaranteed to be available—draws near.
“Firms that have not begun this work in earnest, and do not have plans to complete it by end-2021, run significant financial and reputational risks,” the FSB said. “Firms need to end use of Libor in new contracts as soon as possible and, where possible, to accelerate their efforts to remove their reliance on Libor within legacy contracts.”
While the FSB saw progress in derivatives and securities markets, it said the “transition in lending markets has been slower, and needs to accelerate. . . . Firms undertaking their transition away from Libor should not delay their programs until the emergence of possible forward-looking term versions of risk-free rates” like the Secured Overnight Financing Rate, the Alternative Reference Rates Committee’s preferred alternative for U.S. dollar Libor.
In related news, the Commodity Futures Trading Commission today issued no-action relief to swap dealers and other market participants related to the transition from swaps referencing Libor. Each no-action letter outlines conditions for relief connected to amending swaps to reference replacement rates.