Odd Lots How The Transition Away From LIBOR Is Actually Going
Jun 4, 2020
Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and chair of the Alternative Reference Rates Committee, shares insights on transitioning from LIBOR, a rate tied to over $350 trillion in assets. He discusses the intricate challenges and solutions involved in shifting to the secured overnight financing rate (SOFR). The conversation dives into issues like navigating legacy contracts, the importance of actual transaction-based benchmarks, and strategies to manage risks associated with 'tough legacy' securities during this monumental financial shift.
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ARRC and SOFR
- The Alternative Reference Rates Committee (ARRC) was formed in 2014 to select a replacement for LIBOR and create a transition plan.
- They chose SOFR, based on the secured overnight financing rate, due to its high volume of daily transactions, aiming to avoid issues similar to LIBOR's.
Paced Transition and Tools
- The ARRC aims to facilitate a paced transition from LIBOR to SOFR, not a cliff effect.
- They've developed tools for legacy contracts, fallbacks, and new product pricing, to ease the transition process.
SOFR's Repo Connection
- SOFR is based on U.S. Treasury-backed repo, a market that remained robust even during the financial crisis.
- Its high daily trading volume makes it a more stable choice compared to other alternatives like the Fed funds rate.