U.S. FDIC highlights several alternatives for widely used pricing benchmark

WASHINGTON, March 20 (Xinhua) -- The Federal Deposit Insurance Corporation (FDIC) issued an article on Wednesday, highlighting several alternatives for a good old interest rate benchmark named London Inter-bank Offered rate (LIBOR).

LIBOR, one of the most frequently used interest rate benchmarks or reference rates for decades, was widely used in pricing assets and liabilities, as well as off-balance sheet derivative contracts.

"Due to initiatives that could transition financial markets away from the use of LIBOR, this reference rate may not be available to financial institutions to use after 2021," said the FDIC.

In its article, the FDIC highlighted that several groups, foreign and domestic, had already begun creating alternatives to LIBOR.

The FDIC first mentioned the idea from the Alternative Reference rate Committee (ARRC), which was established by the Federal Reserve Bank of New York. In 2017, the ARRC developed the Secured Overnight Financing rate (SOFR), primarily for dollar denominated derivative products.

Another U.S-based alternative reference rate is Ameribor, which was created by the American Financial Exchange (AFX). Ameribor reflects the borrowing costs of more than 100 small and mid-sized banks in the United States.

Outside the United States, several other groups also created their own reference rates. However, the FDIC said none of these reference rates had attained the popularity of LIBOR so far.

Some examples of these reference rates were the reformed Sterling Overnight Index Average (SONIA), the Swiss Average rate Overnight (SARON), or the unsecured overnight call rate selected by the Japanese.

As new types of reference rates revealed themselves, the FDIC said it noticed the possible impact on the financial market, but wouldn't endorse or require the use of any particular reference rate for now.

"The FDIC recognizes that the potential move away from or reduced use of LIBOR may result in some adjustments for financial institutions that have the rate embedded in contracts," said Doreen R. Eberley, director of the FDIC Division of Risk Management Supervision.

"The FDIC believes that the use of a particular reference rate is a business decision for each institution based on its needs and unique circumstances," FDIC stressed.