The End of LIBOR: SOFR and Related Updates

Week of February 3rd

As recently reported, during the week of February 3rd, the New York Fed infused, through the repo market, an aggregate of $112.3 billion with a potential demand of an aggregate of $168.6 billion.[1]

Week of February 10th

During the week of February 10th, the New York Fed infused, through the repo market, an aggregate average of $102.6 billion. This was comprised of (i) average overnight repo purchases of $42.6 billion and (ii) 14-day term repo purchases of $60 billion. It should be noted that term repos in an aggregate amount of $112.7 billion were submitted to, but only $60 billion were accepted by, the New York Fed.

Consequently, during this week, liquidity needs were likely even higher than the New York Fed’s infusions.

Continued Lack of Federal Reserve Transparency

In contrast to the prior liquidity infusions by the New York Fed in response to Secured Overnight Financing Rate (SOFR) volatility in September 2019,[2] the foregoing New York Fed infusions were associated with no year-end liquidity or SOFR volatility concerns.

Overnight repo purchases and term offerings by the New York Fed were scheduled to end on February 14th. Instead, these offerings were extended through March 12th as follows: (i) overnight repo offerings of at least $100 billion and (ii) bi-weekly 14-day term repo offerings of at least $20-25 billion.[3]

Unlike the majority of the prior New York Fed offerings, no Statements Regarding Repurchase Operations were issued by the New York Fed to explain the rationale for its offering actions in 1Q 2020.[4]

Potential LIBOR Transition Extension

It was recently announced that the requirement to report LIBOR by the LIBOR Panel Banks may be extended beyond the announced December 31, 2021 deadline but only for a short period of time – ‘a period of months, not years’.[5] Undoubtedly, this ‘drop dead’ date, which I thought would only be extended as the deadline approached, will likely be extended due to the magnitude of the task at hand of transitioning to SOFR (i) from the general widespread use of LIBOR in financial instruments worldwide and (ii) an estimated $36 trillion of legacy LIBOR-based instruments that mature beyond the December 31, 2021 deadline.[6]

[1] See The End of LIBOR: SOFR Updates, dated February 10, 2020 (the “February 2020 SOFR Update”).

[2] See the section entitled ‘Recent Fed Liquidity Infusions’ in The End of LIBOR: SOFR Volatility and LIBOR Transition Update, dated November 7, 2019.

[3] See the New York Fed’s most recent Repurchase Agreement Operational Details.

[4] Also see the sections entitled ‘Fed Liquidity – Recent Available Infusions – 1Q 2020’ and ‘Fed Liquidity – Recent Actual Infusions – Rationale’ in the February 2020 SOFR Update.

[5] See Letter to the International Swap Dealers Association (ISDA), dated January 20, 2020, from Richard Fox, Head of Markets Policy of the U.K. Financial Conduct Authority (U.K. FCA). This letter was prompted by ISDA’s recent letter to Financial Stability Board (FSB) co-chairs Andrew Bailey (Bank of England Governor and Chief Executive Officer of the U.K. FCA) and John Williams (New York Fed President).  FSB is comprised of (i) the central banks of twenty-five (25) countries and other jurisdictions, (ii) international financial institutions including the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and The World Bank, and (iii) international standard-setting and other bodies including the Basel Committee on Banking Supervision, the International Accounting Standards Board (IASB), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS).

[6] See the section entitled ‘Recent Related Events – CFTC – Meeting’ in The End of LIBOR: SOFR Updates, dated December 27, 2019. Recently, the New York State Department of Financial Services (DFS) extended its requirement that regulated institutions, insurers and funds submit to DFS their LIBOR transition risk management plans from February 7th to March 23rd.