US banks to get Fed guidance soon on approaches to existing Libor contracts that mature after benchmark is halted

10 Nov 2020 12:48 pm by Neil Roland

US Federal ReserveUS banks will be able to follow upcoming Federal Reserve policies that address approaches to existing Libor-referenced contracts that mature after the benchmark is due to expire, said Governor Randal Quarles, the Fed’s regulatory chief.

“There are a variety of ways,” Quarles, the vice chairman for supervision, told the Senate Banking Committee today. “Within the next month or two, we should have a plan to share that would address that.”

Banks are exploring different approaches with each other and with the Fed, he said. The US central bank also is in discussions with the UK’s Financial Conduct Authority, which oversees Libor, as well as the Basel-based Financial Stability Board, the regulatory coordinator for the Group of 20 economic powers.

— 2021 expiration —

The Financial Conduct Authority and other regulators around the world have said they will stop supporting the tarnished interest-rate benchmark at the end of 2021. These authorities have been pushing banks and other financial firms to switch to alternative, market-based rates.

New financial contracts have posed less of a problem than existing, or legacy, contracts that already reference Libor.

“We need to consider a mechanism that would allow so-called legacy contracts, the great bulk of them, to mature on their existing basis without having to be renegotiated and shifted to a new rate,” Quarles said.

Federal policymakers have been particularly vexed by cash contracts that lack a substitute rate to kick in once Libor is shelved.

Thousands of lawsuits could be filed by counterparties to cash contracts such as securitizations and floating-rate notes without more legal certainty.

A Fed-sponsored panel overseeing the transition has submitted a draft bill to the New York state legislature, but there is no guarantee these lawmakers will pass it. The vast majority of Libor-linked contracts fall under New York law.

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