537 Days: Time Is Still Ticking

July 13, 2020
John C. Williams, President and Chief Executive Officer
Remarks at LIBOR: Entering the Endgame (a webinar hosted by the Bank of England and the New York Fed) As prepared for delivery

It's a great pleasure to be sharing a platform with Andrew Bailey to discuss the transition away from the London Interbank Offered Rate (LIBOR), a topic of critical importance to the safety and soundness of the financial system.

The ongoing transition away from LIBOR has ramifications for institutions, markets, and regulators across the globe, making cooperation at the international level of critical importance.

The last time Andrew and I spoke together on this topic was almost exactly a year ago, when the world was a very different place.1 In the intervening months, we've experienced a devastating pandemic that has caused hardship across the world, and has led to the worst recession in living memory here in the U.S.

Since the advent of the pandemic, this is the first speech I've given on a topic other than the economic outlook and monetary policy. Despite the array of challenges we're facing as a result of the coronavirus, transitioning away from LIBOR continues to be of paramount importance.

Today, I'm going to talk about what the Alternative Reference Rates Committee (ARRC) and others have achieved in the face of enormous adversity and what still needs to be done between now and the end of next year.

But before I continue, let me give the usual disclaimer that the views I express are mine alone and do not necessarily reflect those of the Federal Open Market Committee or anyone else in the Federal Reserve System.

A Challenging Year

With a pandemic that's touched every aspect of our way of life, it's easy to forget why transitioning away from LIBOR is so important.

It's 13 years since the LIBOR scandal first hit the headlines, and it's still an unreliable reference rate. LIBOR submissions from banks are largely based on judgment, rather than real numbers, making the rate vulnerable to manipulation and fraud, and bringing increased risk with its use in financial contracts.2 In fact, this problem became even more acute this spring during the period of severe market stress, when term lending transactions based on LIBOR became even more scarce than usual. Thus, the urgency to switch to more robust reference rates and deal with legacy contracts has not gone away; if anything, this issue has become more pressing.

Unsurprisingly, the pandemic has caused some reprioritization of work streams as the official sector and market participants adjusted to social distancing restrictions and worked to keep their employees safe.

But the importance of transitioning 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. The clock is still ticking, and it's critical that regulators and institutions continue to work together to ensure we are all ready for January 1, 2022.

What We've Achieved

Even with the unprecedented situation of a global pandemic, I'm encouraged that a huge amount of progress has been made on the LIBOR transition since the last time Andrew and I spoke.

Far from slowing down, the pace of progress has accelerated.

In the United States, there have been numerous consultations issued, a raft of recommendations published, and a variety of new tools developed, all to support the transition to more robust reference rates.

These include a consultation on the recommended spread adjustment methodology for cash products transitioning to the Secured Overnight Financing Rate (SOFR), the publication of recommended fallback language for adjustable rate mortgages (ARMs) and student loans, as well as checklists to help different types of institutions navigate the transition.

There has also been a great deal of interest in the possibility of SOFR-linked Treasury securities, and the U.S. Treasury recently asked for comments on such a concept. The consultation closed last week, and I hope many of the institutions present today shared their views.3

Another significant milestone is that in March, the New York Fed started the publication of SOFR averages and a SOFR index. The New York Fed now publishes three compound averages of SOFR daily, which are less variable than daily rates and may be useful for some applications.4

SOFR is based on a much higher volume of underlying transactions than LIBOR, making it more representative of market conditions and less vulnerable to manipulation. It's also the rate selected by the ARRC as its preferred replacement for USD LIBOR.

If the pandemic has confirmed one thing about financial benchmarks, it's the resilience of robust reference rates, including SOFR. On a backdrop of enormous turmoil and uncertainty, both in financial markets and the broader economy, SOFR was a dog that didn't bark (or bite). The New York Fed publishes a number of overnight secured and unsecured funding rates, and during this tumultuous period, they all moved in concert, anchored by the rates set by the Federal Reserve. This success may not have attracted headlines, but it demonstrates the value of robust reference rates that are a fair representation of the underlying market.

In addition in March, the ARRC proposed draft legislation in New York to deal with legacy contracts—a particularly challenging issue.5

And finally, Fannie Mae and Freddie Mac will stop accepting ARMs based on LIBOR by the end of 2020. And they plan to begin accepting ARMs based on SOFR later this year.6

Yes, it's fair to say that a huge amount of progress has been made in many directions over the past 12 months. It's encouraging that even in the face of a global pandemic, neither the official sector, nor the industry, has lost forward momentum.

Next Steps

But we cannot afford to be complacent. With just 537 days left, there's still much to accomplish.

This year the ARRC reiterated its commitment to support the industry through the remainder of the transition. In April, the ARRC published its 2020 objectives, which laid out a number of important milestones that need to be achieved.7

Key areas of focus include work to address the challenges associated with legacy contracts, the development of a forward-looking SOFR rate, and finalizing the ARRC-recommended spread adjustment for legacy contracts transitioning to SOFR.

In May, the ARRC followed up with the publication of recommended best practices for market participants.8 This included timelines for a variety of products, including floating-rate notes, business and consumer loans, securitizations, and derivatives.

It's critical that market participants meet the milestones set out in the best practices and have a clear understanding of any outstanding exposure they have to LIBOR. There are checklists and implementation guides available for institutions working to adopt SOFR,9 and market participants are encouraged to adhere to the ISDA protocol on a timely basis following its publication.

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. I hope it goes without saying that new use of USD LIBOR in financial contracts should stop. As I've said before, let's not make the existing hole we're trying to climb out of even deeper.10


I'll conclude with this: Transitioning away from LIBOR to more robust reference rates is a huge and complex undertaking. It involves numerous jurisdictions, multiple types of institutions, and a raft of financial products. Since July last year, the ARRC, the official sector, and market participants have all made remarkable progress in the most challenging of circumstances to prepare themselves for the end of LIBOR. The ongoing commitment and the forward momentum are welcome, positive signs. As we mark days off the calendar, let's all make sure we use the remaining time wisely and effectively.

1 John C. Williams, 901 Days, Remarks at the Securities Industry and Financial Markets Association, New York (July 15, 2019).

2 See Bank of England, Interim Financial Stability Report, May 2020, p. 13, Box 1.

3 Treasury Department, Development and Potential Issuance of Treasury Floating Rate Notes Indexed to the Secured Overnight Financing Rate, 85 Fed. Reg. 31282 (May 22, 2020).

4 Alternative Reference Rates Committee, Transition from LIBOR.

5 Alternative Reference Rates Committee, Proposed Legislative Solution to Minimize Legal Uncertainty and Adverse Economic Impact Associated with LIBOR Transition, March 6, 2020.

6 Fannie Mae and Freddie Mac, LIBOR Transition FAQs.

7 Alternative Reference Rates Committee, 2020 Objectives.

8 Alternative Reference Rates Committee, Best Practices for Completing Transition from LIBOR.

9 Alternative Reference Rates Committee, Practical Implementation Checklist for SOFR Adoption, September 2019.  

10 John C. Williams, 901 Days, Remarks at the Securities Industry and Financial Markets Association, New York (July 15, 2019).  

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