A year ago we published our thoughts on the significant regulatory and operational challenge of the proposed transition away from the ubiquitous LIBOR benchmark. Now, with less than two years to go before LIBOR is due to be phased out, we provide an update on what regulators, markets and Neuberger Berman have been doing to prepare. There is still a lot to be accomplished, but we are encouraged by the level of co-operation between industry and regulators and by the rapid growth in SOFR-linked financial markets.
- Progress by Regulators and Government Agencies
- Regulations to remove tax liabilities arising from benchmark changes have been proposed in the U.S.
- Consultations are underway regarding the publication of Secured Overnight Funding Rate (SOFR) averages and indices.
- The important Federal Home Loan Banks have been instructed to cease LIBOR-linked transactions that mature after 2021.
- Progress in Financial Markets
- The SOFR-linked cash and derivative markets have grown rapidly during 2019.
- By the end of December 2019, there was almost $250 billion worth of SOFR-linked cash securities outstanding, more than $600 billion of outstanding notional value in SOFR swaps, and more than $2 trillion of open interest in SOFR futures.
- Concerns about the volatility of SOFR are not justified, in our view.
- Progress on Fallback Language
- The Federal Reserve Bank of New York’s Alternative Reference Rates Committee (ARRC) has released final recommended fallback contract language for new issuances of cash securities such as FRN, syndicated loans, bilateral loans, securitizations and ARMs.
- The International Swaps and Derivatives Association (ISDA) has published its consultation results regarding methodologies for spread adjustments between LIBOR and replacement rates such as SOFR.
- Progress at Neuberger Berman
- At Neuberger Berman, a committee has been meeting to monitor developments, identify risks and create a task list for all relevant areas of our business.
- Looking Forward—Challenging But Promising
- Two years is a challenging timeframe and there are issues still to be resolved, but we are encouraged by the level of co-operation between industry and regulators and by the rapid growth in SOFR-linked financial markets.
Rapid Growth in the Sofr-linked Cash Securities Market