Fill me in:
Financial contracts like loans, securities, and derivatives reference financial benchmarks to set borrowing costs and interest rates. The London Interbank Offered Rate (LIBOR) is the key interest rate benchmark that shows the average interest rate at which major global banks borrow from each other. Trillions of dollars in financial contracts are based on LIBOR, however, LIBOR likely will not continue to be published beyond 2021.
Why does it matter?
This will impact consumers, businesses, investors, banks, and borrowers. Many consumer credit products like credit cards, car loans, student loans, and mortgages are tied to LIBOR. Derivatives contracts are also tied to LIBOR. Many commercial businesses, like farmers and energy companies, use derivatives contracts to hedge their risks. If that market is disrupted, or those contracts are more expensive, those businesses would charge higher prices for their goods and services to consumers.
Number to know:
$200 trillion. The number of financial contracts referencing USD LIBOR.
Our Take:
Given that LIBOR may not exist beyond 2021, it is important for companies, financial firms, consumers, and other stakeholders to discuss what must be done to transition smoothly away from LIBOR. Therefore, the Center for Capital Markets Competitiveness, along with the Bipartisan Policy Center (BPC), and the International Swaps and Derivatives Association (ISDA) are hosting an event to bring together regulators, Alternative Reference Rates Committee (ARRC) members, and industry stakeholders to discuss the progress of transitioning away from LIBOR, impacts on various types of financial transactions, perspectives from market participants, and an outlook on next steps.
What’s next?
The ARRC in the U.S. has identified the Secured Overnight Financing Rate (SOFR) as the preferred alternative in the U.S. to LIBOR. New and existing contracts must begin to reference SOFR or other alternatives to LIBOR before the end of 2021.
More reading:
- ARRC resources, including white papers, the paced transition plan, fallback language for contracts, webinars, and other announcements and documents.
- Bank for International Settlements, “Beyond LIBOR: a primer on the new benchmark rates”