| Randal K. Quarles Testimony* | Our Interpretation |
|---|---|
| “A mechanism that would allow so-called legacy contracts, the great bulk of them, to mature on their existing basis …” | Many existing LIBOR contracts can continue to maturity. The “mechanism” might be: • A continuation of LIBOR submissions. • A legislative definition of a “safe-haven.” • A redefinition of the methodology (also known as “synthetic” LIBOR). The mechanism is likely to last 2-3 years, but not indefinitely. If true not all contracts will be addressed and remediation will still be needed for longer-dated items. It will come with a deadline for ending new LIBOR issuance. |
| “ … without having to be renegotiated and shifted to a new rate” | Existing economics continue. |
| “Within the next month or two, we should have a plan to share that would address that.” | Discussions are already in progress; a timeline would not be announced if there were not the makings of a plan already. Most straightforward is to continue USD LIBOR, which would require consent from the UK Financial Conduct Authority (FCA). |
| Other Considerations: | Our Interpretation |
| Is this a US federal legislative approach? | Does not seem likely given specific statements to lawmakers. |
| Does this affect the pending New York State legislation? | Not directly, although if there are fewer LIBOR contracts it will be less impactful. |
| Which loans and contracts are affected? | Likely all USD LIBOR contracts under US law. The global situation is murkier. While we anticipate a “last date” for writing new contracts in the US, globally it may be possible to write new USD LIBOR loans not under the purview of the Fed. |
| Is this likely to occur? | Yes. We do not think the Fed would discuss in Congress unless likely. |
| Why now, and not before? | We hypothesize the Fed recognized that millions of LIBOR contracts moving to fallbacks is disruptive and wants a less risky path. The more interesting question is why was this not determined earlier on in transition. |
| Will the proposed mechanism affect all existing USD LIBOR contracts? | Likely yes under US law, not as clear globally. |
| Does this have knock-on effects across the financial system? | Absolutely. We are assessing this across the system and multi-currency facilities and swaps are two core areas of examination. We believe the ISDA protocol for swaps needs synchronization with the mechanism. Right now, the FCA declaring LIBOR “unrepresentative,” triggers swaps moving off LIBOR and this is anticipated in 2021. But this does not move loans off LIBOR and any scenario where the two fall out of sync raises enormous issues. |
| What about other market developments? | The interplay between this proposal and the UK’s “synthetic LIBOR” approach is not clear.
The interplay between this proposal and NYS/Federal legislation is also not clear. It is unlikely the mechanism will apply to other LIBOR currencies. |
