New York Fed President John Williams. (Photo: Bloomberg) New York Fed President John Williams. (Photo: Bloomberg)

New York Fed President John Williams has a message for all U.S. companies involved in financial contracts: Refrain from any new use of U.S. dollar-based Libor.

“It doesn’t matter whether you’re a large global bank or a local company with a handful of employees, you need to be prepared to manage your institution’s transition away from Libor,” Williams said in a webinar hosted by the New York Fed and the Bank of England.

Libor, the London Interbank Offered Rate, has been used as the reference rate for adjustable-rate loans such as mortgages, student loans and credit card debt but is being discontinued by the end of 2021 because of scandal. Investigations by regulators in Europe and the U.S. in 2012, prompted by reports years earlier, found that several bankers manipulated Libor rates, costing borrowers billions in overpayments.

“The transition from Libor is so great that despite the effects of COVID-19, the overall timeline remains the same: There are now 537 days until the existence of Libor can no longer be assured,” Williams said. “The clock is still clicking.”

While the pandemic didn’t disrupt the timeline for ending the use of Libor as a key reference lending rate, it exacerbated its unreliability. “This spring during the period of severe market stress … term lending transactions based on Libor became even more scarce than usual,” Williams said.

“The urgency to switch to more robust reference rates and deal with the legacy contracts has not gone away,” he said. “If anything, this issue has become more pressing.”

Andrew Bailey, governor of the Bank of England, who also participated in the webinar, agreed, noting that Libor is “no longer sufficiently active” and market volatility in March reinforced “the need to replace Libor.”

In the interim before Libor disappears, Fannie Mae and Freddie Mac, U.S. government-sponsored enterprises that support the mortgage market, will stop accepting ARMs based on Libor by year-end 2020 and the U.S. Treasury is considering issuing securities linked to the Secured Overnight Financing Rate, the recommended alternative for Libor in the U.S.

In addition, the Alternative Reference Rates Committee (ARRC), a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition away from U.S. dollar (USD)-based Libor to a more robust reference rate, continues to work on a smooth transition, and the New York Fed is publishing daily SOFR Averages and a SOFR Index on its website.

The ARRC has laid out a number of milestones that should be met before Libor disappears as well as best practices for market participants concerning floating-rate notes, business and consumer loans, securitizations and derivatives. 

“It’s critical that market participants meet their milestones set out in the best practices and have a clear understanding of any outstanding exposure they have to Libor,” Williams said.

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