Late last week, the Federal Reserve’s Alternative Reference Rates Committee (ARRC) tackled one of the greatest challenges confronting the U.S. market as LIBOR’s demise nears in 2021, the $1.2 trillion in ARMs set against LIBOR that must transition to the secured overnight financing rate (SOFR). Although ARRC’s work and the GSEs’ statement apply only to newly-originated loans, the legacy volumes involved are daunting. Indeed, the LIBOR transition is proving an event of such complexity that many fear it poses its own systemic risk. The ARRC’s work is a formidable effort to squeeze ARMs into a new benchmark rate, but we expect the challenges here to be still greater than those for derivatives and capital-markets instruments.
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