Fed's Powell: Complicated Transition From LIBOR to SOFR Ahead

By Jean Yung

     WASHINGTON (MNI) - U.S. market participants are moving ahead with

transitioning away from LIBOR to the highly robust Secured Overnight Financing

Rate, a process that will be complicated but necessary, Federal Reserve Gov. Jay

Powell said Thursday. 

     Members of the Alternative Reference Rates Committee, a group of market

participants charged by the Fed and other authorities with finding an

alternative to the LIBOR reference rate, "have become more comfortable with the

idea that a transition is feasible, even if the necessity of achieving it is

regrettable," Powell said. 

     Despite strengthened governance over the London Interbank Offered Rate

after cases of attempted manipulation, there are not enough underlying

transactions to form a stable basis for the rate, Powell said. 

     "LIBOR may remain viable well past 2021, but we do not think that market

participants can safely assume that it will," he said. 

     By contrast, the reference rate chosen by the ARRC as a LIBOR alternative,

the SOFR, is the "most robust rate available," Powell said, as it has about $700

billion per day of transactions underlying it, a volume that dwarfs that of

other term markets. 

     The ARRC has so far focused on transitioning derivatives contracts away

from LIBOR because that is where the largest gross exposures to LIBOR are, and

because it may be easier for many derivatives transactions to move away from

LIBOR to a new rate, Powell said, but they may need to more seriously consider

transitioning other products away from LIBOR as well. 

     The committee has plans to eventually create a term reference rate, which

may help to smooth any transition, Powell said. Such a rate will not be as

robust as SOFR but could conceivably be used in some loan or other contracts

that currently reference LIBOR. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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