At last, a Libor Replacement Is at Hand
Libor is well on its way to being replaced with a new short-term benchmark.
A committee formed by the Federal Reserve in 2014 to come up with a transition plan named a broad Treasury repo rate as its preferred alternative to Libor, which traders see as having many drawbacks, including being subject to manipulation.
Next, the Alternative Reference Rate Committee (ARRC) will work on a transition and implementation plan, which it will publish later this year, before new guidelines take effect.
Ian Lyngen and Aaron Kohli of BMO Capital Markets have a nice, succinct explanation of what it means in their morning note:
The intent of the rate is to replace Libor over several years and offer a rate that's reflective of actual borrowing costs while not being subject to manipulation. The impact for now is limited since it will take many years to build up a market with the new rate, and the implementation won't begin till the final proposal is released later this year. It does, however, show that the market and regulators are moving forward with the process.