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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: email@example.com