The End of LIBOR: SOFR Updates

Year-End

As last reported, the New York Fed made available a significant amount of additional liquidity through its offerings of (i) at least $120 billion of overnight repos and (ii) at least $35 billion in bi-weekly operations, all through January 14th.[1] 

This was done so as to meet year-end cash needs in the banking system.

1Q 2020

The foregoing infusions were generally extended by the New York Fed on January 15th.

At the time the New York Fed instituted the year-end Fed liquidity infusions as well as the other liquidity infusions since September 17, 2019, when the first countermeasures by the New York Fed were announced to deal with Secured Overnight Financing Rate (SOFR) concerns,[2] the New York Fed issued a Statement Regarding Repurchase Operations.

In fact, eleven (11) such Statements Regarding Repurchase Operations were issued beginning on September 17th.[3] However, no such Statement of New York Fed Operating Policy was issued on January 15th explaining the rationale for such additional liquidity infusions.

Fed Liquidity – Recent Actual Infusions

1Q 2020 (Week of February 3rd)

During the week of February 3rd, the New York Fed infused, through the repo market, an aggregate average of $112.3 billion. This was comprised of (i) average overnight repo purchases of $52.3 billion and (ii) 14-day term repos purchases of $60 billion. It should be noted that term repos in an aggregate amount of $116.3 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.

Rationale

Absent year-end liquid concerns and without a Statement Regarding Repurchase Operations setting forth the Federal Reserve’s Operating Policy, it is not clear of the Federal Reserve’s policy for such repo purchases. This is especially curious in light of the Federal Reserve’s consistent practice to be more transparent to the financial markets at least since the onset of the Great Recession.

The next Client Alerts will address, among other things, the following topics: (i) results of the New York State Department of Financial Services (DFS) requirement that regulated institutions, insurers and funds submit to DFS their LIBOR transition risk management plans by February 7th, (ii) SEC guidance and examination priorities, (iii) Alternative Reference Rates Committee (ARRC) consultations, (iv) municipal industry-related developments from the Government Accounting Standards Board (GASB), the Government Finance Officers Association (GFOA), the Municipal Securities Rulemaking Board (MSRB) and the National Association of Bond Lawyers (NABL), (v) U.K. Financial Conduct Authority (FCA) guidance, (vi) litigation-related developments including from the U.K. Serious Fraud Office (SFO) and the Southern District of New York, and (vii) International Swaps and Derivatives Association (ISDA) industry protocols.

[1] See The End of LIBOR: SOFR Updates, dated December 27, 2019.

[2] The Financial Stability Oversight Council (FSOC) recommends that (i) relevant authorities undertake a focused review of the September 2019 events and assess the broader implications for financial stability and (ii) financial regulators monitor developments concerning money market funds for any financial stability implications. See FSOC 2019 Annual Report. FSOC is comprised of the following voting members: Treasury Secretary, Federal Reserve Chair, Comptroller of the Currency, Director of the Consumer Financial Protection Bureau (CFPB), Chair of the Securities and Exchange Commission (SEC), Chair of the Federal Deposit Insurance Corporation (FDIC), Chair of the Commodity Futures Trading Commission (CFTC), Director of the Federal Housing Finance Agency (FHFA), Chair of the National Credit Union Administration (NCUA) and a President-appointed independent member having insurance expertise.

[3] See Footnote 1 of The End of LIBOR: SOFR Volatility and LIBOR Transition Update, dated November 7, 2019, referencing the initial eight (8) Statements.