8.1 Overview
In 2014, in response to concerns that interbank offered rates used in hundreds of
trillions of dollars of financial assets were unstable and being manipulated by some
of the banks, global regulators established committees to develop alternative rates
and processes for reporting those rates. At that time, the Federal Reserve Board and
the Federal Reserve Bank of New York convened the Alternative Reference Rates
Committee (ARRC) to identify a suitable alternative to the U.S. dollar LIBOR and to
create an adoption plan to facilitate the acceptance and use of one or more
alternative reference rates. In 2017, the ARRC identified the SOFR rate as its
preferred alternative rate.
The FASB’s reference rate reform project was established to address constituents’
concerns about certain accounting consequences that could result from the global
markets’ anticipated transition away from the use of LIBOR and other interbank
offered rates to alternative reference rates. The first phase of the reference rate
reform project resulted in the October 2018 issuance of ASU 2018-16, which amended ASC 815 to add the
SOFR OIS rate as a fifth U.S. benchmark interest rate (see Section
2.3.1.1).
The next phase of the reference rate reform project focused on concerns that, without
new guidance and relief, entities’ application of contract modification and hedging
requirements under U.S. GAAP to modifications triggered by reference rate reform
would be costly to implement and result in financial reporting that did not
faithfully represent management’s intent or risk management activities. In response,
the FASB issued ASU 2020-04 in March
2020. ASU 2020-04 added a new Codification topic, ASC 848, to provide temporary,
optional expedients related to contract modification accounting and hedge
accounting. For more information about the ASU, see Section 8.2.
In 2020, as part of global market participants’ efforts to
transition to using or referencing alternative reference rates, changes were made by
certain central clearing parties (CCPs) to the interest rates used for discounting
and for variation margin settlements and PAI.1 For example, on July 24, 2020, the CME changed the interest rate used in
certain euro contracts for discounting and PAI from the Euro Overnight Index Average
(EONIA) to the Euro Short-Term Rate (ESTR). In addition, on October 16, 2020, it
changed the interest rate used in U.S. dollar contracts for discounting and PAI from
the daily Effective Federal Funds Rate (EFFR) to SOFR. Interest rate transitions
such as the CME’s changes do not necessarily replace reference rates that are
expected to be discontinued (e.g., the daily EFFR is not expected to be
discontinued), and they are not limited to contracts that reference a rate that is
expected to be discontinued (e.g., the CME’s interest rate transition applies to all
U.S. dollar interest rate products, not only those that reference LIBOR or another
rate that is expected to be discontinued). The CME’s interest rate transitions, for
example, are intended to increase the trading volume in alternative reference rates
(e.g., ESTR and SOFR). Accordingly, not all of the discounting transition
modifications would be within the scope of ASC 848. In response to these concerns,
the FASB completed the third phase of its reference rate reform project by issuing
ASU
2021-01 in January 2021. See Section 8.3 for a discussion of the provisions
of ASU 2021-01.
In December 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC 848 until December
31, 2024. The ASU became effective upon issuance.
Publication of LIBOR on a representative basis was ceased for one-week and two-month
USD LIBOR settings after December 31, 2021. Publication of remaining USD LIBOR
settings was ceased after June 30, 2023.
Footnotes
1
PAI is also referred to as the price alignment amount (PAA)
by the London Clearing House, and price alignment (PA) by the CME.