WASHINGTON–The market indicators that are intended to support the soon-to-be-replaced interest-rate benchmark LIBOR have been announced by a Federal Reserve working group.
LIBOR, or the London Interbank Offered Rate (LIBOR), is scheduled to be discontinued at the end of this year, and any contracts using LIBOR after June 2023 are to use the new benchmark rate.
The Fed said its Alternative Reference Rate Committee (ARRC), which was created by the Federal Reserve Bank of New York, said the market indicators will be used in recommending a “forward-looking” secured overnight financing rate (SOFR).
In turn, the Fed group said the market indicators ARRC said it will consider in recommending the SOFR term rate are:
- Continued growth in overnight SOFR-linked derivatives volumes
- Visible progress to deepen SOFR derivatives liquidity, consistent with ARRC “best practices,” which include offering electronic market-making and execution in SOFR swaps and swap spreads; changing the market convention for quoting USD derivative contracts from LIBOR to SOFR; and making markets in SOFR-linked interest rate volatility products (including swaptions, caps, and floors)
- Visible growth in offerings of cash products, including loans, linked to averages of SOFR, either in advance or in arrears
‘Useful Tool’
“The ARRC has long recognized that a forward-looking term SOFR rate will be a useful tool to support the transition away from LIBOR,” the Fed stated. “The publication of the indicators builds on the ARRC’s March 23 update, ongoing ARRC discussions, and term rate principles, and provides clear guidance that would allow the ARRC to recommend a SOFR-based term rate relatively soon.
“The indicators are designed to measure progress in establishing deep and liquid SOFR derivatives and cash markets – which are essential to a robust and stable term rate,” the statement continued.
No Recommendation Yet
The Fed working group emphasized it has not yet recommended any forward-looking SOFR term rate or administrator and that it will continue to consider the proposals submitted to its request for proposals (RFP) to do so.
“Given U.S. supervisory guidance (referring to a Nov. 30, 2020, joint statement by federal banking agencies), the ARRC continues to encourage market participants not to wait for a term rate and to make use of current SOFR conventions available now,” the group stated.
The full statement can be found here: ARRC Identifies Market Indicators to Support a Recommendation of a Forward-Looking SOFR Term Rate