Agencies: No Plans to Recommend Credit-Sensitive Element to SOFR

The U.S. financial agencies do not plan to recommend a credit-sensitive element to the Secured Overnight Financing Rate or a credit-sensitive rate, agency heads said in a letter to a group of regional banks yesterday. Noting that the banks had participated in conversations with the agencies earlier this year, the agencies said that individual banks may seek different characteristics when selecting a reference rate for a commercial loan. “As a result, the official sector is not well-positioned to adjudicate the selection of a reference rate between banks and their commercial customers.”

However, the agencies agreed to hold additional meetings to highlight “continued innovation” in alternative reference rates and address hurdles to transitioning commercial loans away from the London Interbank Offered Rate. The agencies also emphasized that “supervisors will not criticize firms solely for using a reference rate (or rates) other than SOFR.”

Several market participants have urged authorities to include a credit-sensitive element in SOFR that would align it more closely to the funding costs of a broad range of banks. The letter—which was reported today by Politico—was signed by Treasury Secretary Steven Mnuchin, Federal Reserve Chairman Jerome Powell and Vice Chairman Randal Quarles, Federal Reserve Bank of New York President and CEO John Williams, Acting Comptroller of the Currency Brian Brooks, Securities and Exchange Commission Chairman Jay Clayton, FDIC Chairman Jelena McWilliams and Commodity Futures Trading Commission Chairman Heath Tarbert.