The Federal Reserve, Office of the Comptroller of the Currency and FDIC issued a joint statement Monday encouraging banks to transition away any financial contracts based on U.S. dollar-denominated Libor rates.
The Libor rate, short for the London Interbank Offered Rate, is the reference rate for many adjustable or floating rate loans in the corporate and municipal market. It is expected to expire at the end of 2021 and be replaced with another reference rate, which differs by region.
However, the Intercontinental Exchange, administrator of the Libor rate, announced Monday “to consult on its intention to cease publication” of only “one-week and two-month U.S. dollar-denominated Libor at the end of December.”
It intends to continue to publish the remaining dollar-denominated Libor rates — for one-, three-, six- and 12- month and overnight — until the end of June 2023.
The extension into 2023 would “allow most legacy USD-denominated Libor contracts to mature before Libor experiences disruptions,” according to the joint statement from the Fed, OCC, and FDIC.
Still, the agencies are urging financial institutions against “entering into new contracts that use U.S. dollar-denominated Libor as a reference rate as soon as practicable and in any event by Dec. 31, 2021” to avoid safety and soundness risks.
New contracts entered into before the end of 2021 should “either utilize a reference rate other than Libor or have robust fallback language that includes a clearly defined alternative reference rate after Libor’s discontinuation,” according to the statement.
Such actions are “necessary to facilitate an orderly — and safe and sound — Labor transition,” the group statement explained.
The agencies, recognized, however, there could be limited circumstances to justify a bank entering into a new dollar-denominated Libor contract, such as market making in support of client activity related to that benchmark rate.
The joint agency statement made no mention of SOFR, the Secured Overnight Financing Rate (SOFR), which has been expected to replace the Libor reference rate for transactions in the U.S.
In early November the three agencies released a statement that they “are not endorsing a specific replacement rate for Libor loans” and a bank may use “any reference rate for its loans” that it deems “appropriate for its funding model and customer needs” as long as it includes specific language on a fallback rate.
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