Replacing Libor as the benchmark for outstanding securities is so challenging that an industry working group may ask the New York legislature to lend a hand, David Bowman, special adviser to the Federal Reserve Board of Governors, said Tuesday.
Since most U.S. securities transactions are subject to New York law, it could be expedient to pass legislation defining the London interbank offered rate as the secured overnight financing rate plus a spread, Bowman said at the Structured Finance Industry Group conference in Las Vegas. This would obviate the need to amend documents governing $1.1 billion of leveraged loans and $800 billion of collateralized loan obligations, most of which never anticipated that Libor might cease to be published.
Loans and other floating-rate instruments typically require 100% of investors to sign off on material amendments. But identifying investors is a challenge because financial assets are held “in street name” by a brokerage firm, bank or dealer on behalf of a purchaser, obscuring their true ownership.
Many existing floating-rate instruments will begin to pay a fixed rate of interest in the event Libor is no longer published after the end of 2021, when current contributors are free to abandon the benchmark. Other notes have no permanent contractual provisions.
“We" — the Alternative Reference Rates Committee — "could go to the legislature and say, ‘It’s pretty clear that issuers did not intend for these to convert to fixed-rate instruments, and did not envision a permanent stop to Libor,' " Bowman said.
“We need to make sure that the legal arguments are sound” before doing so, he added. And if ARRC it does take that step, “we hope to have wide and vocal support from this industry.”
Libor is also used as a reference rate for residential mortgages and other kinds of floating-rate consumer loans, including student loans and auto loans. Bowman said replacing the benchmark for these products must be handled differently, and ARRC will be consulting with the Consumer Financial Protection Bureau and consumer interest groups. "Any solution for consumers needs to be fair and transparent and in no way harm those consumers," he said.
In order to accomplish this, the working group will have to be able to communicate the process to the general public very clearly, he said.
