June 14, 2021

Financial Stability Oversight Council Pushes for SOFR

At a Financial Stability Oversight Council meeting, Federal Reserve Board ("FRB") Vice Chair for Supervision Randal K. Quarles warned banks that the use of USD LIBOR quotes available after December 2021 is appropriate only for legacy contracts, and using them for new products would create safety-and-soundness risks.

Mr. Quarles encouraged the move toward the Secured Overnight Financing Rate ("SOFR"). He stated that, while FRB guidance for noncapital markets products clearly permits lenders and borrowers to choose their rates, the benefits of SOFR mean it will play a role in these markets.

At the meeting, SEC Commissioner Gary Gensler expressed concern that a number of commercial banks have shown interest in the use of the Bloomberg Short-Term Bank Yield Index ("BSBY"), a potential replacement for LIBOR. Mr. Gensler argued that, similar to LIBOR, which is a "modest market, shouldering the weight of hundreds of trillions of dollars in transactions," BSBY - with its trading volume in the single-digit billions - would have the same problem. Because of this "mismatch," he said, BSBY might be vulnerable to manipulative conduct. Mr. Gensler advocated for SOFR.

Treasury Secretary Janet L. Yellen expressed support for SOFR, highlighting that it would "provide a robust rate . . . with underlying transaction volumes that are unmatched by other LIBOR alternatives." Ms. Yellen also challenged the use of alternative rates where the volume of derivatives contracts could outnumber the transaction volume underlying the reference rate.

FDIC Chair Jelena McWilliams reported that FDIC-supervised institutions are "generally on track" to adopt a replacement rate and address legacy contracts by year-end. Ms. McWilliams said that, while the majority of FDIC-supervised institutions do not have "material LIBOR exposure," those that do (i.e., banks with total assets exceeding $10 billion and larger community banks) have "generally developed appropriate plans." Ms. McWilliams reiterated that the FDIC does not endorse any particular alternative reference rate.

OCC Acting Comptroller Michael Hsu stated that the OCC "expect[s] every bank, regardless of size, to demonstrate that its replacement rate selections are appropriate for the bank's products, funding needs and operational capacities."

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