The end of the London Interbank Offered Rate (LIBOR) index, slated for the end of this year, requires urgent action and collaboration between the public and private sectors. Though LIBOR has previously been described by financial analysts as “the world’s most important number,” there is some limitation to its reach. That does not diminish the necessity for action, however.
This is according to Tom Wipf, vice chairman of institutional securities at Morgan Stanley and chair of the Alternative Reference Rates Committee (ARRC) — a public-private committee convened and sponsored by the Federal Reserve to facilitate the transition in the U.S. Wipf published his perspective in a new op-ed at Bloomberg.
“The proposed endgame provides more specifics about exactly how and when USD LIBOR will end,” Wipf writes. “It calls for new use of USD LIBOR to stop as soon as possible and no later than the end of 2021. The plan also allows most existing USD LIBOR-based contracts to mature on their own terms by proposing that the chief USD LIBOR tenors stop publishing in mid-2023.”
This timeline should not be misconstrued as a reprieve for most institutions using the index, Wipf says. Rather, it should be interpreted as a clear timeline for a transition that remains an urgent issue, and should encourage as much in-depth planning as possible from those still employing the LIBOR index.
“The ARRC has focused on facilitating a smooth transition from USD LIBOR to a more robust alternative, called the Secured Overnight Financing Rate, or SOFR,” Wipf says. “With the official sector’s support, our members are committed to making this transition a success because it ultimately affects everyone.”
Wipf also explains why and how ARRC ultimately arrived at SOFR as the answer for a viable replacement index, describing years of work and a recently-completed assessment of the decision.
“The ARRC arrived at SOFR in 2017 after more than two years of research and consultation,” he explains. “The ARRC is making it as straightforward as possible for market participants to transition to SOFR ahead of the end of the year with tools like our best practices. Importantly, the ARRC recently assessed how those best practices align with the proposed endgame and determined that our recommended dates are fully consistent.”
For the reverse mortgage industry’s part, the Government National Mortgage Association (GNMA, or “Ginnie Mae”) announced last September new restrictions on the eligibility of Home Equity Conversion Mortgage (HECM)-backed Securities (HMBS) for adjustable rate loans operating off of the LIBOR index, effective for all HMBS issuances dated on or after January 1, 2021, nearly a year ahead of the planned sunset of the index.
However, the January 1 date was recently revised to March 1, 2021, a new timeline reportedly reached in consultation with the reverse mortgage industry. The official recommendation from the National Reverse Mortgage Lenders Association (NRMLA) regarding the selection of a new index is to adopt SOFR, due to its wider use in the realm of financial services according to Michael McCully, partner at New View Advisors.
“We believe that moving to a niche index [like the CMT] for a niche product is the opposite direction [we want to be moving in] that we all are attempting to avoid,” McCully said at the NRMLA Annual Meeting in November. “We’re really working very hard to make our industry [the providers of] a more mainstream financial solution, and we don’t believe that remaining with CMT, for the long term, will have that intended effect.”
Read Tom Wipf’s op-ed at Bloomberg.
