Financial Services

U.S. group recommends contract terms if LIBOR ceases

NEW YORK, April 25 (Reuters) – A private market group sponsored by the Federal Reserve and other U.S. agencies on Thursday recommended terms and conditions in new contracts on floating-rate notes and syndicated loans which reference the London interbank offered rate (LIBOR).

LIBOR gauges what banks say they would charge each other to borrow dollars. It is the benchmark for $200 trillion in dollar-denominated financial products, mostly in interest rate swap contracts.

But LIBOR’s reputation as the market standard has been tainted in the wake of rigging scandals by traders, which resulted in billions of dollars in fines for major global banks, including Deutsche Bank.

Regulators set LIBOR to be phased out in 2021 and have encouraged alternatives, most notably the Secured Overnight Financing Rate (SOFR), to take its place.

“These provisions are for market participants’ voluntary use in new contracts that reference LIBOR and were developed with the goal of reducing the risk of serious market disruption in the event that LIBOR is no longer usable,” the Alternative Reference Rates Committee (ARRC) said in a statement.

Thursday’s recommendations on “fallback” language is part of the ARRC’s transition plan for the market to move from LIBOR to SOFR.

The fallback language is intended to define terms on events that trigger the start for a transition away from LIBOR, a benchmark rate to replace LIBOR and a spread adjustment component of the benchmark replacement, according to ARRC.

“We encourage market participants to incorporate this language into new contracts, and when possible, to begin writing contracts using SOFR instead of U.S. dollar LIBOR,” said ARRC chair Tom Wipf, who is also the vice chairman of institutional securities at Morgan Stanley, in a statement.

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The ARRC said it plans to release recommended fallback language for bilateral business loans and securitizations “soon.” (Reporting by Richard Leong Editing by James Dalgleish)


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