Next steps post LIBOR cessation for US markets
One month into the new year, we check-in to see how initial progress is shaping up in the US post-LIBOR cessation period, and gauge how the US markets are likely to continue to react as the year unfolds…
SOFR was first resisted by corporate treasurers and financial institutions, in part because it did not reflect credit risk in the same manner that LIBOR does. The Alternative Reference Rates Committee (ARRC), a body of banks, insurers, and asset managers created by the New York Federal Reserve, endorsed the benchmark’s forward-looking term structure on July 29, brightening the outlook for SOFR implementation. Since then, the switch has gained traction.
Whilst bigger players have embraced SOFR adoption, others are taking a more cautious approach, waiting to see what happens next. Smaller firms are still looking at the bigger players to plan their next steps, but they should seriously consider making transitional moves, and quickly.
Firms will need to address key concerns in 2022
The Alternative Reference Rates Committee (ARRC), which includes financial institutions and the Federal Reserve, announced that it has identified a few significant concerns where additional work would be required to enable a seamless transition away from LIBOR. One of the concerns lays with LIBOR bases futures.
The ARRC reiterated its recommendation for an end to the signing of new LIBOR-linked financial contracts post deadline, suggesting that market participants should be aware of and plan for the potential risk that liquidity in LIBOR markets could fall beyond the deadline.
Another concern that remains is that LIBOR loans aren’t due to mature until December 31st, 2022, and many borrowers and lenders have not adopted their first SOFR loan until recently.
Some borrowers demand additional information about the pricing of SOFR-linked loans, according to the committee, and it appears that smaller borrowers may be provided fewer borrowing options than larger borrowers.
If you have not transitioned – do so now.
Firms that have not adequately transitioned post the 31st of December may be subject to significant legal liabilities and other concerns. According to the Financial Stability Oversight Council (FSOC), which includes leaders from several federal agencies, including the Securities and Exchange Commission and the Federal Reserve, market participants who do not execute plans for this transition could face significant legal, operational, and economic risks.
Getting your post deadline efforts right, first time around, is critical
Regulators and governing bodies are serious about the issuance of penalties and fines for those who have not fully transitioned to alternative reference rates. Even with a passed deadline, key areas of concern will need to be addressed and this usually requires external expertise and resource.
Momenta will provide additional resources for the main areas of the post-LIBOR transition process, allowing you to focus on the project’s strategic oversight while we assist you to put your vision into action.
This flexibility helps you to ensure that your team is constantly striking the appropriate balance, resulting in a more effective solution that benefits your end client’s results.
Throughout the post-LIBOR transition process, Momenta can provide fully built teams to support in all key disciplines, including:
- Identifying the contracts that need to be swapped
- Re-papering according to an appropriate index rate
- Reviewing fallback language
- Calculating the fluctuated pricing in each contract due to the new IBOR attached to any calculation or swap
- Contract negotiation and review
- Communications to the end customer regarding their new rates
Additional skilled and experienced resource will help you to avoid wasted time and help your clients transition their contracts to a new index on-time, efficiently, and effectively.