By Ann Marie Bria, DTCC Managing Director, Asset Services Business Management
With the upcoming cessation of the London Inter-Bank Offered Rate (LIBOR), the industry is now focused on taking the necessary steps to transition away from the LIBOR benchmark to alternative indices, such as Secured Overnight Financing Rate (SOFR).
LIBOR, which has been in use for several decades, is an interest rate average calculated from the estimated average daily transactions between several different London-based banks. This rate has historically been the global benchmark for many financial instruments and is estimated to have been leveraged in over US$200 trillion worth of contracts globally. The benchmark has been leveraged to calculate interest rates on debt borrowed for loans, derivatives, and securities, so that debt holders can be paid their scheduled coupon payments. Given regulatory concerns around the structure and robustness of LIBOR, in 2017, a decision was made by the UK Financial Conduct Authority (FCA) to cease publishing the LIBOR rate. Since then, the financial services industry and the global regulatory communities have been focused on the orderly transition away from LIBOR ahead of the June 30, 2023, cessation date
Any existing securities, maturing after June 30, 2023, that are currently using LIBOR (USD) to calculate their interest rates will need to choose, and communicate, a replacement rate to the investor community prior to the cessation date. In support of this, DTCC has been working with the Federal Reserve Bank of New York (FRBNY) Alternative Reference Rate Committee (ARRC) and industry participants to create a centralized process to disseminate standardized benchmark replacement details, including via DTCC’s Legal Notice System (LENS), a repository, recommended by the ARRC, of security-related documentation and a new Autoroute file that communicates replacement rate details in a machine readable format directly to market participants.
The LENS repository is an example of industry tools available to assist in centralizing the communication of the replacement rate for LIBOR and enable issuers, their associated trustees, agents and the investor community to be prepared to disseminate information in advance of the LIBOR retirement date. Security issuers, their trustees and agents can add standardized, descriptive benchmark replacement rates directly into the LIBOR Replacement Index Communication Tool, with LENS users able to select and view this information as a new notice type. In addition, buy- and sell-side firms and data solutions providers can subscribe to and consume machine readable output. The solution allows for the fielding of standardized, descriptive reference data for efficient, machine-to-machine communication instead of individuals or teams assigned to source and review large, complex legal documents to determine these details.
The financial industry has been gearing up for the shift from LIBOR for some time, and with the cessation date less than three months away, firms should act now. To ensure readiness, market participants should focus on assessing which contracts are impacted, identify solutions to update the records, and implement changes to ensure compliance with the forthcoming regulatory mandate.
