You may have noticed that I didn’t mention an ARRC consultation on fallbacks for derivatives, even though ARRC’s original purpose was to address benchmark transition in derivative products. That’s because the FSB’s Official Sector Steering Group asked ISDA to do that for derivatives on all of the IBORS. So, alongside the ARRC consultations for cash products, ISDA has been conducting consultations on fallback provisions for IBORS in multiple currencies,20 and has said it will be putting out a U.S. dollar LIBOR consultation in the near future. One of the key questions being discussed is how closely aligned the cash products fallbacks and the derivatives fallbacks will be. The ARRC has also been an essential vehicle for engaging the official sector to address regulatory obstacles to LIBOR transition. For example, replacing fallback language in legacy, uncleared swaps presents a host of issues under the swap margin rules. ARRC’s regulatory working group is actively engaged with the Commodity Futures Trading Commission, the Federal Reserve, and other regulators to address those. On the accounting side, the Financial Accounting Standards Board has ruled that SOFR is eligible for hedge accounting treatment. While all the consulting and coordinating and kvetching has been going on, market participants have gone ahead and begun the transition to actually using SOFR. SOFR swaps are being quoted by dealers and cleared by central counterparties. CME Group and LCH are clearing SOFR-linked swaps and are moving quickly to using SOFR for discounting curves and interest on collateral. CME Group and Intercontinental Exchange have listed SOFR-linked futures.
Perhaps it would go away eventually, maybe dying of loneliness, or perhaps it would stagger on for a small range of transactions—but in any event it would cease to be a problem. While this work was underway, new regulations brought the production of LIBOR under the supervision of the UK Financial Conduct Authority (FCA) and introduced minimum requirements for benchmarks used in the EU. In 2017, Andrew Bailey, the head of the FCA, spotlighted the possibility that LIBOR itself might cease to exist altogether. 13 Bailey announced that the FCA had been exerting an increasing amount of persuasion to get panel banks to keep submitting quotes, and had gotten their commitment to continue until the end of 2021. But he warned that the FCA could not ensure that LIBOR would be published at all after that. Suddenly, instead of just the general threat that LIBOR could cease to be produced someday, there was a specific expiration date on the horizon. The challenge to the market was no longer to gradually start writing new contracts on alternative rates like SOFR instead of LIBOR, but to prepare for the risk that LIBOR could entirely cease to exist within a fairly short time frame. That was a much bigger job, because when you looked at the underlying contracts that used LIBOR, they didn’t provide very well for LIBOR simply disappearing. I blame the lawyers, and our congenital lack of imagination.