Federal Reserve Bank of New York President William C. Dudley argued that "aggressive action" is needed across the financial industry to address market-wide issues concerning the global market transition away from LIBOR.
In his remarks at Bank of England's Markets Forum, Mr. Dudley expressed concern over "the great uncertainty over LIBOR’s future and the risks to financial stability that would likely accompany a disorderly transition to alternative reference rates." He stated, "we need aggressive action to move to a more durable and resilient benchmark regime."
Mr. Dudley recounted the history and other factors that led to the need for the global markets to transition away from LIBOR. He emphasized that this transition represents a significant risk for firms "of all sizes," which should actively manage the risks in a way that is commensurate with their exposures.
Mr. Dudley emphasized the important role of the official sector, including the Federal Reserve and the Financial Stability Board, in the development of reference rate principles, convening private sector participation and supplying robust alternative reference rates. He recognized the progress made by market participants acting through the Alternative Reference Rates Committee to identify a more robust U.S. dollar reference rate and to develop a plan for an orderly transition, including best practices in contract design. Mr. Dudley opined that "LIBOR is likely to go away – and it should," but noted that there are those with a direct interest in LIBOR, "such as its administrator," who support the "status quo."
According to reports, the transition from LIBOR to an alternative reference rate should not subject legacy swap contracts to new European Market Infrastructure Regulation margin requirements.
ISDA urged the Financial Accounting Standards Board to adopt a broad-based Secured Overnight Financing Rate swap rate for hedge accounting.
NY Fed President and CEO William Dudley encouraged financial institutions to ensure that incentives are aligned with responsible behavior, and that controls are in place for the early detection of misconduct.
The Alternative Reference Rates Committee outlined a plan to transition market reliance away from LIBOR, recommended the Secured Overnight Financing Rate as an alternative, and presented a plan to implement the new rate by 2021.
Available only to Cabinet Premium subscribers.
Combining regulatory and enforcement news, analysis, and practical work tools on an easy-to-use digital platform.