Countdown to the End of LIBOR: Transition Efforts Accelerate Ahead of June 30 Deadline
June 5, 2023
It is hard to believe that nearly six years have passed since Andrew Bailey, the then-CEO of the Financial Conduct Authority (FCA), sent shockwaves through the financial world by declaring the imminent end of LIBOR. Initially slated for the end of 2021, the cessation date for the publication of most USD LIBOR settings was eventually extended to June 30, 2023, allowing for an adequate transition period.
In the U.S., the responsibility of identifying a replacement rate for USD LIBOR fell to the Alternative Reference Rates Committee (ARRC). CREFC is a member of the ARRC.
Go Deeper. After an extensive evaluation process, the ARRC selected the Secured Overnight Financing Rate (SOFR) as the preferred alternative in June 2017. Following Andrew Bailey's announcement, the ARRC was reconstituted in March 2018 to develop comprehensive strategies facilitating the transition away from LIBOR across all cash products, including loans and securitizations.
The Countdown. Ever since, market participants have renegotiated contracts, updated systems and models, and incorporated fallback provisions into new agreements. The ARRC has played a crucial role in guiding this transition, offering guidance, establishing working groups, and enforcing deadlines to ensure market participants are well-prepared for LIBOR’s cessation.
For securitizations, the ARRC selected CREFC as a co-chair of the Securitizations Working Group (SWG). This collaborative effort has fostered increased awareness and adoption of alternative rates, marking a significant shift in the financial landscape.
In their most recent statement, released on May 31, 2023, the ARRC emphasized the importance of being prepared for the end of USD LIBOR. The statement urged market participants with LIBOR exposures to complete their transition efforts now, and to draw upon the resources and tools that have been made available. The statement also warned that those unprepared for the transition will face “significant ramifications, including uncertain and potentially unfavorable outcomes regarding their legacy LIBOR contracts along with operational disruptions.”
The countdown to June 30, 2023, has begun, and the coming months will be crucial as we bid farewell to the era of LIBOR. Financial institutions and market participants must be prepared and act proactively to safeguard the integrity of financial markets. While the end of LIBOR marks a significant milestone, it also opens doors to a new and improved era. The broader market's embrace of SOFR, along with the development of market conventions and the deepening liquidity in SOFR-linked instruments, has created a solid foundation for this new era.