8/14/2023 0 Comments Levfin insightsReflecting the coordinated messaging and guidance of FSB, FSOC, the US Federal Reserve, and other US and global regulators, the Alternative Reference Rates Committee of the Fed (“ARRC”) on January 25, 2023, published its Summary of Key ARRC Recommendations (“ARRC Key Recommendations”), in which it emphasized acting now to remediate LIBOR contracts by using SOFR as a replacement rate, and communicating planned rate changes to related parties as soon as possible. 6 FSOC reiterated its position on these matters at its Principals Meeting held on December16, 2022. 5 FSOC advises market participants to take advantage of any existing contractual terms or opportunities for renegotiation to transition their remaining legacy LIBOR contracts before the end of June 2023. In its December 16, 2022, Annual Report (“FSOC 2022 Annual Report”), the Financial Stability Oversight Council of the US Department of Treasury (“FSOC”) described LIBOR as “a key risk to financial stability, bank safety and soundness, and market integrity.” 4 The FSOC 2022 Annual Report also noted and endorsed the ARRC’s position that-because widespread use of Term SOFR in cash products likely would cause an increase in Term SOFR derivatives, which could lead to a decline in the overnight SOFR derivatives markets that are essential to the construction of Term SOFR-use of Term SOFR should be limited. In recent months, US regulators and advisory groups have made their views increasingly clear about LIBOR’s infirmities, the safest structure for SOFR, and the need for market participants to increase efforts to transition LIBOR-linked portfolios. While some segments of the market are well advanced in transitioning from the London InterBank Offered Rate (“LIBOR”) to the Secured Overnight Financing Rate (“SOFR”), the lending market generally is behind.īloomberg reports that “oughly three-fourths of the $1.4 trillion US leveraged loan market still needs to flip to SOFR … to meet a deadline of the end of June….” 1 The Loan Syndications & Trading Association (“LSTA”), citing LevFin Insights and JPMorgan Chase Bank, N.A., confirms that “approximately 80% of institutional loans and remain on LIBOR and need to transition….” 2 Those estimates are consistent with the Financial Stability Board’s (“FSB”) December 16, 2022, Progress Report on LIBOR and Other Benchmarks Transition Issues (“FSB Progress Report”), which estimated outstanding LIBOR loan exposure at $2 trillion at the end of 2020. Attention Loan Market Participants: There are fewer than 145 days until US dollar LIBOR no longer is published on a representative basis.
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