On May 20, 2016, the Alternative Reference Rates Committee (ARRC) issued an Interim Report and Consultation, summarizing its progress toward narrowing the set of potential rates that could be used as market alternatives to replace US LIBOR. The need to replace the LIBOR benchmark first emerged after widespread evidence of abuse and rate-rigging with respect to LIBOR and other benchmarks was uncovered (see DOJ LIBOR Manipulation Investigation Chart).

The two rates that the ARRC has preliminarily identified as potential replacements for US LIBOR are:

The estimated notional volume of outstanding financial products indexed to US LIBOR is more than $160 trillion, 90% of which is made up of derivatives (primarily interest rate derivatives), with the remaining 10% made up of, among others, corporate loans, retail mortgages, floating rate bonds, and securitized financial products.

A "paced transition" to the new rate is suggested that would:

The OBFR and the GC repo rate were chosen from an original group of six potential replacements. The four rates that were ultimately rejected included:

The AARC was created by the Federal Reserve in response to a Federal Stability Oversight Council (FSOC) recommendation that the US cooperate with foreign regulators, international bodies, and market participants to identify alternative interest rate benchmarks to US LIBOR and other common interbank rates in accordance with the IOSCO Principles for Financial Benchmarks (see Practice Note, Hot topics: Benchmark reform: EU and international regulatory initiatives: International Organization of Securities Commissions (IOSCO)). The ARRC aims to replace the existing interbank benchmark rates, including US LIBOR, with rates that are based on observable transactions from a robust underlying market.

More recently, LIBOR-replacement efforts have been prompted by a decline in wholesale unsecured short-term lending that threaten to compromise the structural underpinnings of interbank rates. Specifically, without the requisite transaction volume, price discovery is, and will continue to be, uncertain, which reduces US LIBOR's credibility and reliability. For more on international benchmark reform, see Practice Note, Hot topics: Benchmark reform: EU and international regulatory initiatives.

Simultaneous efforts to replace interbank offering rates are being undertaken in a number of other jurisdictions, including the United Kingdom, the EU, Japan, and Switzerland, which are addressed in the report.

Because end users drive demand in these markets, primarily through the use of interest rate derivatives to hedge risk, the ARRC has determined that end users should play a large role in ultimately determining the new rate to be used and how to implement the transition.

Therefore, comments will be accepted on the report through July 15, 2016 at the email address [email protected] and will be posted on the ARRC's Website. Additionally, a roundtable will take place to provide ample opportunity for end-user comments at the New York Fed on June 21, 2016 at 9:30 a.m., with more to follow in the event of insufficient space at this first roundtable.