United States: Financial Stability Oversight Council Pushes For SOFR
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At a Financial Stability Oversight Council meeting, Federal Reserve Board
(“FRB”) Vice Chair for Supervision Randal K. Quarles warned banks that the use of USD LIBOR quotes
available after December 2021 is appropriate only for legacy
contracts, and using them for new products would create
Mr. Quarles encouraged the move toward the Secured Overnight
Financing Rate (“SOFR”). He stated that, while FRB
guidance for noncapital markets products clearly permits lenders
and borrowers to choose their rates, the benefits of SOFR mean it
will play a role in these markets.
At the meeting, SEC Commissioner Gary Gensler expressed concern that a number of commercial
banks have shown interest in the use of the Bloomberg Short-Term
Bank Yield Index (“BSBY”), a potential replacement for
LIBOR. Mr. Gensler argued that, similar to LIBOR, which is a “modest market, shouldering the weight of hundreds of
trillions of dollars in transactions,” BSBY – with its trading
volume in the single-digit billions – would have the same problem.
Because of this “mismatch,” he said, BSBY might be
vulnerable to manipulative conduct. Mr. Gensler advocated for
Treasury Secretary Janet L. Yellen expressed support for SOFR, highlighting that
it would “provide a robust rate . . . with underlying
transaction volumes that are unmatched by other LIBOR
alternatives.” Ms. Yellen also challenged the use of
alternative rates where the volume of derivatives contracts could
outnumber the transaction volume underlying the reference rate.
FDIC Chair Jelena McWilliams reported that FDIC-supervised institutions are “generally on track” to adopt a replacement rate and
address legacy contracts by year-end. Ms. McWilliams said that,
while the majority of FDIC-supervised institutions do not have “material LIBOR exposure,” those that do (i.e., banks
with total assets exceeding $10 billion and larger community banks)
have “generally developed appropriate plans.” Ms.
McWilliams reiterated that the FDIC does not endorse any particular
alternative reference rate.
OCC Acting Comptroller Michael Hsu stated that the OCC “expect[s] every
bank, regardless of size, to demonstrate that its replacement rate
selections are appropriate for the bank’s products, funding
needs and operational capacities.”
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