In a year-end progress report, the Alternative Reference Rates Committee ("ARRC") highlighted positive momentum in the transition away from USD LIBOR. The ARRC emphasized (i) U.S. regulators' calls for banks to stop new use of USD LIBOR and (ii) that certain LIBOR currencies are set to end after December 31, 2021.
The ARRC observed progress in the transition to the Secured Overnight Financing Rate ("SOFR"), stating SOFR will put the financial system on a more stable footing with an "enduring foundation, with a rate that is transparent, well-designed, and grounded in market transactions." The report highlighted:
- the substantial increase in volume and liquidity in SOFR swaps (up 600% since the March 2021), citing the importance of CFTC Market Risk Advisory Committee's "SOFR First" initiative (see related coverage);
- that almost all Floating Rate Notes now reference SOFR;
- that floating rate agency mortgage-backed securities are now solely based on SOFR; and
- how the ARRC's recommendation of term SOFR has helped transition the loan market, where there is now more SOFR-based business lending.
The ARRC warned market participants that they should be aware of and plan for the potential risk that liquidity in LIBOR markets could decline after the end of 2021.
The ARRC identified the following areas where it believes additional work will be required for 2022:
- LIBOR-based futures activity, including Eurodollar futures and options;
- further development of SOFR conventions for loans, and additional information about SOFR pricing to create more SOFR options for smaller borrowers;
- market conventions in the securitization markets; and
- continuing to prepare markets for the end of USD LIBOR in June 2023 by building on (i) legislative progress in New York and Alabama and (ii) federal legislation passed by the House of Representatives.
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