IGTA Journal - Summer 2018

-2- economy who make the make the goods and provide the services that keep the wheels turning and the lights burning on Main Street. Treasurers around the world are preparing for the day when the interest rate indexes we have been using, in some cases since the mid-1980s, will no longer be availa ble. More than US$ 300 trillion of financial instruments, from adjustable rate home mortgages, to credit cards, to corporate loans, along with a whole book of intra-group transactions are all priced using the London Inter-bank Offered Rate (“LIBOR”). The rate began officially in the mid-1980s with its publication by the British Bankers Association. It is a consensus of clearing banks’ estimates of the rates with various maturities they charge for unsecured inter-bank loans. However, a very large edifice has been built on a foundation that lacks observable transactions. Cracks in this edifice became alarmingly evident during the 2008 financial crisis. Inter-bank lending on an unsecured basis, especially in maturities beyond one month, declined drastically. Over a dozen banks ultimately paid fines to regulators for rigging their LIBOR submissions. In some cases, the banks sought a trading advantage, in others they underpriced the rates to hide from the market their alarmingly high true cost of funding. With banks fearing liability for submitting rates possibly subject to challenge for the lack of underlying market transactions, concerns have been rising that LIBOR quotations could collapse in a future financial crisis. Last July, Andrew Bailey, Chief Executive of the UK’s Financial Conduct Authority, announced his agency could not assure publication of LIBOR after year-end 2021. The International Organization of Securities Commissions (“IOSCO”) presciently released principles in 1998 that called for basing interest-rate indexes based on observable transactions. The IOSCO Principles became the roadmap following the financial crisis for re-creating interest-rate indexes like LIBOR. The first effort for the global financial markets was led by the Financial Stability Board (“FSB”) following its formation in April 2009 by the Group of Twenty governments (“G-20”). In 2013 and 2014 the FSB established a Market Participants Group (“FSB-MPG”) that considered IOSCO-compliant interest rate indexes for the U.S. dollar, sterling, euro, Swiss franc, and Japanese yen. I represented treasurers for the U.S. dollar LIBOR analysis, which recommended an observable rate linked to U.S. Treasury securities. Similar recommendations were made for sterling and the other currencies in the FSB-MPG report of July 2014. In 2014 the Federal Reserve convened a new Alternative Reference Rates Committee (“ARRC”) with an initial membership of 15 banks to identify best practices for U.S. alternative reference rates, best practices for contract robustness, and develop an adoption and implementation plan with an achievable timeline and metrics for success. In 2017 the ARRC recommended a broad Treasury repo financing rate, the Secured Overnight Financing Rate (“SOFR”), as the interest rate index that should replace LIBOR. In March 2018, the ARRC was reconstituted with 27 members and in addition to major money-center banks now has non-bank financial institutions and trade groups, including the NACT. Treasurers in many cases are subject to entirely different forces in the upcoming LIBOR transition than are their counterparts in financial institutions. For example, treasurers must work within their businesses to identify the many internal uses of LIBOR for such things as assessing customers for late payments, pricing inter-company intra-group loans, determining an adjustment to an asset or corporate purchase based on changes in the targeted closing date, to name just a few. In moving from the unsecured LIBOR IGTA eJournal | Summer 2018 | 43