Transition to SOFR Pushing Ahead Despite Pandemic

# Foreign Exchange

# Risk Management

The pandemic and its aftermath forced bank treasurers to move the Libor-to-SOFR transition to the back burner; but make no mistake, it is still very much still on the stove.

With apologies to the real estate industry, there were three critical issues that mattered to bank treasurers before the pandemic: 1) Libor to SOFR transition, 2) Libor to SOFR transition and 3) Libor to SOFR transition. But now, given COVID-19’s damaging impact on world economies, banks have been presented with new priorities, like securing adequate liquidity and the Paycheck Protection Program (PPP). This mindset has led many banks to thinking that they should back-burner the transition until the coast is clear. Another driver of this thinking is that many treasurers haven’t been so keen on moving away from Libor in the first place. Lingering skepticism. Several members of NeuGroup’s Bank Treasurers’ Peer Group (BankTPG), meeting virtually recently, revealed wariness of jumping on the SOFR train too soon. “People want someone else to be first mover,” said one member in a breakout session at the meeting, which was held virtually. There was not a lot of interest at his bank, he said, adding that SOFR-based lending “would be sticking out like a sore thumb” among peers. Another member said his bank was “not operationally ready” to move off Libor. “We could find an alternative rate,” he added.

There is “a lot of discovery that hasn’t been done yet,” noted another member in the breakout. “The lending business has to evolve.” Another member added there are “a lot of things we can’t do operationally,” however, what he said the bank should be doing “is educating our customers: whatever replacement they’re going to.”

Unfortunately, bank treasurers are going to have to overcome their hesitancy. The show must go on. According to a presentation at the meeting by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chair of the Federal Reserve’s Alternative Reference Rates Committee (ARRC), the committee is “taking the timelines provided by the official sector as given and continuing its work, recognizing that although some near-term goals may be delayed, other efforts can continue.” In other words, do not assume Libor will continue to be published at the end of 2021, Mr. Wipf told meeting attendees. One of the official authorities the ARRC cites is the UK Financial Conduct Authority. The FCA in late March said the end-Libor date “has not changed and should remain the target date for all firms to meet.”

“The transition from Libor remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms,” the FCA said in a statement.