US Treasury – FSOC meeting on Money Market Reform and LIBOR Transition

June 11, 2021

LIBOR Transition
Treasury Secretary Yellen spoke on the need to transition to a risk-free benchmark rate. Since 2012, ARRC identified SOFR as a robust rate, suitable for use with most products. At a critical juncture as work is still needed for an orderly transition, with business loans behind schedule. Selecting an alternative rate will determine if some LIBOR shortcomings are replicated for SOFR, if derivatives volume far exceeds underlying transactions, and could be manipulated.

There is a need for a forward-looking SOFR term rate to help transition, with the OCC arguing that it is critical for banks to adopt SOFR in all markets to ensure financial stability.

FDIC Chair Williams said that most FDIC-supervised banks are on target as no material LIBOR exposures exist for them, over $10 Billon banks are advanced, and the FDIC does not endorse any rates.

SEC Chair Gensler recounted the history of the LIBOR problem as little lending of unsecured term loans between banks, and then people determining rate had no objective basis. Rates could be easily manipulated, and now banks recommending Bloomberg Short-Term Bank Yield Index (BSBY), Gensler argued against, has the same problems as LIBOR. Mismatched benchmark will lead to manipulation even if seemingly more robust now.

Money Market Funds Reform
FSOC statement on the importance of short-term markets seen in spring 2020 Covid crisis. The FSOC welcomes SEC involvement and needs for the reform of structural vulnerabilities. SEC Chair Gensler said work is crucial, directed SEC staff to look into these issues, in coordination with other federal agencies, and to consider any further reforms needed. The crisis put particular focus on prime money market funds, their interrelationship with investments in commercial paper, and certificates of deposit that have limited liquidity.

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