In this vein, the Committee’s second report discussed some of the term rate alternatives, and development of proposals for a term reference rate was recently added to its mandate. In this regard, I would also encourage market participants, academics, and other interested parties to contribute to the effort to develop a term reference rate. Another key area of focus—further motivated by Andrew’s warning—is the development of fallback contract language in the event that LIBOR ceases to be published. The absence of such language creates the potential for large-scale disorder in global financial markets should LIBOR go away. Put simply, this is an unacceptable risk. The International Swap Dealers Association (ISDA) has been working on this issue for the derivatives market and is expected to issue a consultative document soon that should prove instrumental in making further progress. The ARRC has also been coordinating a similar effort across cash products of all types. The goal is to achieve consensus on a consistent approach across markets whenever feasible. Looking Ahead As I have noted previously, LIBOR continues to have significant shortcomings despite strengthened governance in recent years, and uncertainty about its future will only grow over time. This uncertainty reflects the limited liquidity underlying LIBOR and the corresponding legal risks I discussed earlier. But, I am also skeptical about whether LIBOR can ever be adequately transaction-based. As Andrew highlighted, there is no guarantee that LIBOR will continue to exist beyond December 2021.
The Financial Stability Board (FSB) has been a galvanizing force at the international level. The FSB and its members have published proposals, plans, and timelines for reference rate reform and have promoted the strengthening of the major interest rate benchmarks. The FSB has been carrying out work on the development and introduction of alternative benchmarks, developing a plan to accomplish a transition to new benchmarks, encouraging work by the private sector on contract robustness, and reporting regularly on the progress made.14 The Federal Reserve has played a lead role in the development of these recommendations as applied to U.S.-dollar LIBOR, working closely with the other major financial regulatory agencies in the United States. This effort has also involved coordinating with the official sector sponsors of similar efforts around the world.15 In late 2014, in response to FSB and Financial Stability Oversight Council recommendations, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC)—a group of market participants established to identify more robust alternative U.S.-dollar reference rates that are risk-free or nearly risk-free, fit the needs of the derivatives market, and are compliant with IOSCO principles.16 This effort paralleled similar ones in other jurisdictions to find reference rates that are well-suited to local conditions and market needs—including the UK’s Working Group on Sterling Risk-Free Reference Rates.