Bloomberg: Wall Street Prepares for the End of LIBOR

The London interbank offered rate (LIBOR), which has served as the backbone of adjustable-rate Home Equity Conversion Mortgages (HECMs) for over a decade and which has formed the benchmark for expected rates and rate adjustments, is set to expire in 2021.

Now, Wall Street institutions are directing their resources to prepare for its end, according to a story in Bloomberg published on Tuesday.

“The major Wall Street banks – not to mention insurers, money managers, law firms and advisory businesses – are all mobilizing employees around the globe in anticipation of LIBOR’s demise,” Bloomberg’s Lananh Nguyen  and Alex Harris write. “The benchmark’s key role in financial markets – at last count it underpins more than $350 trillion of mortgages, loans and derivatives across various currencies – means they’re being pulled from all corners of the industry.”

After international investigations determined that LIBOR was vulnerable to widespread manipulation efforts identified between 2003 and 2012, global regulators started more actively advising financial institutions to move away from the LIBOR standard, preferably by 2021. Financial officials in the U.K. described the oncoming end of LIBOR, saying they’ll stop compelling banks to submit quotes under the standard after 2021.

“The decision has spurred global regulators to push ahead with their own domestic funding-rate alternatives, and forced financial firms to figure how to extricate themselves from a benchmark so thoroughly entwined in global markets,” writes Bloomberg.

The institutions trying to find a path beyond LIBOR are a who’s who of some of the biggest financial operators in the United States.

“At a June roundtable, Goldman Sachs, JPMorgan Chase & Co., Wells Fargo & Co. and others discussed how they’re establishing oversight committees, setting up joint steering groups and recruiting employees to build out their LIBOR transition capabilities,” Bloomberg writes. “Consulting companies such as Oliver Wyman & Co. and Accenture Plc are advising clients on how to best manage the shift, while law firms such as Cadwalader, Wickersham & Taft have helped craft fallback language for credit contracts that reference the benchmark.”

Brian Grabenstein, head of the LIBOR transition office at Wells Fargo, estimated that as many as 200 people at the bank have worked at least 10 hours on issues related to the LIBOR transition over the past 30 days.

“Up until not that long ago, this was not on a lot of people’s radar,” Grabenstein told Bloomberg. “I quickly realized it wasn’t just one person’s full-time role, but in fact it was going to be a number of peoples’ full time jobs.’’

At the National Reverse Mortgage Lenders Association (NRMLA) Eastern Regional Meeting in New York this past May, Ginnie Mae SVP at the office of the president Michael Drayne gave a presentation concerning how the reverse mortgage industry could transition out of LIBOR.

“We’re looking at this, HUD is looking at this, and we’re all participating in the industry working group convened by the Federal Reserve Alternative Reference Rates Committee (ARRC),” Drayne told conference attendees. “The amount of time we have to figure everything out is less reassuring the more you look at how complicated this problem is. […] In the end, on the government side, it’s up to the Secretary of Housing to determine what the main rate is going to be.”

Read the full story at Bloomberg.

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