Last Call on LIBOR: Final Steps to Transition

On Monday, July 11, President John Williams of the Federal Reserve Bank of New York and Chief Executive Nikhil Rathi of the UK Financial Conduct Authority, who together serve as Co-Chairs to the Financial Stability Board's Official Sector Steering Group, co-hosted a hybrid event on the industry's transition away from LIBOR. The event consisted of a moderated discussion with President Williams and Chief Executive Rathi, three panels, and closing reflections covering progress made, lessons learned, and priorities for the final year until the end of the U.S. dollar LIBOR panel in mid-2023.

The event opened with a welcome by Michelle Neal, Head of the Markets Group at the Federal Reserve Bank of New York, followed by the moderated discussion with President Williams and Chief Executive Rathi. In the moderated discussion, President Williams and Chief Executive Rathi discussed the challenges initially faced in the LIBOR transition, success achieved thus far both in the U.S. and the U.K., and the need to maintain a foundation of IOSCO-compliant robust reference rates like SOFR going forward. They also noted the transition effort, which has entailed strong public and private sector partnership on a global scale, can serve as a model for addressing complex financial market challenges in the future.

The discussion was followed by three panels: on progress made, the assessment and remediation of legacy LIBOR contracts, and the communication and operationalization of legacy LIBOR conversions. On progress made, the panelists discussed the development and growth of SOFR-based products including SOFR futures and options, swaps, and cash products.  Panelists noted that SOFR was now the predominant benchmark across these markets.  Several panelists noted that remaining liquidity in LIBOR markets was likely to diminish and encouraged market participants to move from LIBOR to SOFR as opportunities arose ahead of the June 30, 2023 transition deadline.

In the next panel on assessment and remediation of legacy LIBOR contracts, panelists discussed preparations market participants can take to help ensure a smooth transition from LIBOR as described in the ARRC's Legacy LIBOR Playbook. These include taking inventory of the terms of existing LIBOR contracts, understanding how the LIBOR Act or the potential publication of synthetic USD LIBOR rates may impact these terms, and taking steps, where feasible, to pro-actively amend and/or close out LIBOR contracts rather than relying on fallback language and legislation in order to mitigate potential operational issues and give LIBOR contract holders greater control over the conversion terms. The Director in the Division of Banking Supervision and Regulation at the Federal Reserve Board noted that it was "prudent for firms to be actively working down their book of legacy contracts" in light of the sheer volume of legacy U.S. dollar LIBOR contracts outstanding.  Given this volume, he noted that from the Supervisory perspective, there was a risk of a "pile-up" of these contracts in June 2023 as fallbacks are enacted which could create operational risks that would not be conducive to an orderly transition.

In the third panel on communication and operational issues, panelists discussed the importance of having systems in place to convey the rate changes to legacy LIBOR contracts. LCH provided an update on its planned conversion of all LCH-cleared outstanding USD LIBOR contracts into market-standard SOFR OIS equivalents in mandatory events scheduled for April and May 2023. The leads of the Alternative Reference Rate Committee's Operations/Infrastructure Working Group discussed ongoing work to facilitate effective and efficient communication of rate changes in LIBOR debt and securitization contracts following the June 30, 2023 end of USD LIBOR panel and work with the DTCC on its proposed solution for communicating changes via a new system being created by DTCC. Panelists also discussed steps to consider in communications with consumers.

Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chair of the Alternative Reference Rates Committee (ARRC), closed by providing reflections on the ARRC's work in the LIBOR transition over the past several years in a fireside chat with Nate Wuerffel, of the Federal Reserve Bank of New York and David Bowman, of the Federal Reserve Board.

View Presentation for Event Panel: Preparing for Cessation Part I: Contract Assessment & Remediation

View Presentation for Event Panel: Preparing for Cessation Part II: Client Communications

LIBOR Legacy Playbook: Guide describing the existing broad frameworks to support the transition of legacy LIBOR cash products (published by the Alternative Reference Rates Committee)