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US benchmark reform panel endorses forward-looking rate to replace Libor

Libor transition update

The group overseeing the transition from Libor in the United States has approved positive interest rates and has taken an important step in the competition to replace the scandal-damaged benchmarks that underpin hundreds of trillions of dollars in financial contracts.

The Alternative Reference Interest Rate Commission (ARRC), established in 2014 by the Federal Reserve as an industry association to lead the transition to Libor, supports a new term rate created by CME Group based on the US-priority Libor alternative. .. , Known as Sofr.

The panel’s approval of the new interest rate less than six months before the critical switch deadline underscores that pressure regulators and banks are moving away from Libor’s lending benchmarks.

Benchmark reforms were set up based on submissions from major financial institutions rather than market activity Libor was at the heart of a rate rigging scandal 10 years ago, major banks were fined billions of dollars, and traders It takes place after facing a criminal trial. ..

Regulators have decided that banks and businesses should withdraw significantly from Libor by the end of the year and are preparing to switch loans and derivatives with an estimated value of hundreds of trillions of dollars to exchange rates. Existing dollar-denominated transactions have been extended to help them shift, but all new contracts will need to use alternative reference rates starting next year.

However, shifting market participants from the US $ LIBOR is the largest and most important Libor rate, slower than other currencies.

The backing of Term Sofr is extremely important, especially for the loan market. Sofr is an overnight rate that allows you to calculate interest based on the actual transaction at a given point in time. However, many companies have long preferred forward-looking long-term interest rates, such as Libor, because the market shows where they anticipate future interest rates.

This is essential for corporate loans that need to be able to plan future interest payments on their debts, rather than being informed of what they are borrowing a few days before they have to pay. The new Sofr term rate is an attempt to combine two different types of rates.

Morgan Stanley’s ARRC Chairman and Vice Chairman of Institutional Securities Tom Whip said the term rate recommendation was a financial stability outcome and the final goal of the Group’s transition plan by the end of the year.

“Market participants have all the tools they need to get into the transition home stretch,” he said. “It takes only five months to run out of new things. [contracts are pegged to] Libor, important work remains. We encourage everyone exposed to Libor to take immediate action and sign new contracts in the form of Sofr. “

The problem with ARRC’s early impediment to Sofr’s approval period is that the volume of trading activity in the derivatives market related to future outlook rates has not reached a level that gives the group peace of mind that the rates are reliable. was.

This week, the US dollar-denominated interest rate swap market practice switched from Libor to Sofr for transactions between dealers. Second, ARRC’s confidence in the trading activities that underpin Sofr has flourished to a level where the term Sofr can be safely supported.

It was not clear which alternative interest rates would become the new practice in some markets, so it is hoped that approval will drive companies into action and prevent market participants from boosting them.

The group said it only recommends using the term Sofr for business loans and not so widely for derivatives and other markets. The group still prefers to use nighttime Sofr rates based on actual transactions where possible, but in certain situations, such as the loan market, they are aware of the operational need for Term Sofr.

US benchmark reform panel endorses forward-looking rate to replace Libor Source link US benchmark reform panel endorses forward-looking rate to replace Libor

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