Memo from the Commissioner - LIBOR 10-24-2019
Oct 29th, 2019
DATE: October 24, 2019
TO: Chief Executive Officer
FROM: Candace Franks, Bank Commissioner
SUBJECT: London Interbank Offered Rate (LIBOR)
The widely used reference rate known as the London Interbank Offered Rate (LIBOR) is scheduled to go out of existence. The banks that serve on the panel providing the inputs to LIBOR have agreed to support the reference rate only until the end of 2021. Financial institutions should be preparing for this event well in advance of that date.
We are encouraging financial institutions to begin taking risk management actions now to manage the transition from LIBOR. The attached ten step checklist may be used as a starting point for a financial institution’s work in this area. Examiners have been provided a companion job aid that follows these same steps so the checklist can facilitate a discussion about the LIBOR transition.
The Alternative Reference Rates Committee (ARRC) has been meeting since November 2014 to identify a set of alternative US dollar reference rates that are based on transactions from a more robust underlying market than LIBOR. In June 2017, the ARRC identified the secured overnight financing rate (SOFR), which the Federal Reserve Bank of New York publishes in cooperation with the U.S. Office of Financial Research, as the reference rate that represents best practice for use in certain new US dollar derivatives and other financial contracts. Financial institutions may select any reference rate for use, regulators are not mandating the use of SOFR or any other rate.
Please contact our office if you have any questions about managing the transition. To date, the federal regulatory agencies have not issued supervisory guidance on this topic. The web site of the ARRC (www.newyorkfed.org/arrc) is an excellent source for the up-to-date information on developments, including a frequently asked questions document. The FFIEC hosted an industry webinar in December 2018 that provides background information. The archived presentation can be viewed by registering at www.webcaster4.com/Webcast/Page/583/28297.
Ten Steps for LIBOR Transition – A Guide for Financial Institutions
The London Interbank Offered Rate (LIBOR) is scheduled become unusable after 2021 and all financial institutions should prepare for this event. The following ten steps may assist in managing the impact the transition from LIBOR will have on the institution. The steps should be tailored to the size and complexity of each financial institution.
- Set up a process for managing the risk of this transition
- Identify senior executive oversight, provide for coordination of activities, and establish regular reporting to the Board
- Establish a transition management program
- Cover the entire financial institution
- Highlight any unique products and client exposures
- Establish and enforce when the institution will stop accepting new LIBOR exposures
- Develop a strategy for communicating with your customers and counterparties
- Set out the communications plan and timeline
- Describe communication goals and objectives for engagement with internal and external stakeholders as well as customers
- Survey on- and off-balance sheet exposures to identify and quantify LIBOR references
- Ensure the process is not just a snapshot, but a continuous evaluation of existing and new products through 2021
- Develop a strategy for managing each identified exposure
- Implement fallback language if necessary
- Consider replacement products
- Identify, measure, monitor, and control all financial and non-financial risks of the transition
- Develop a process to select and implement fallback rates for all LIBOR references
- Determine when the institution will stop using LIBOR
- Establish the institution’s replacement reference rate for each product
- Remediate contracts that reference LIBOR
- Consider the customer, financial, and legal implications of each existing LIBOR product with a maturity beyond 2021
- Develop operational readiness plans
- Consider changes that may be needed in data, models, technology, and training
- Determine accounting and reporting considerations
- Discuss with legal and accounting firm as appropriate
- Update financial disclosures as needed
- Determine tax and regulatory requirements
- Consult with external accounting firms as appropriate
These steps may be enough for an institution with limited LIBOR exposure to prepare for the transition. The Alternate Reference Rates Committee (ARRC) maintains a web site with information about the transition from LIBOR (including frequently asked questions) that can be a valuable reference point for all financial institutions. Institutions can refer to the ARRC’s Practical Implementation Checklist for SOFR Adoption released on September 19, 2019 for more detailed guidance. No regulator mandates the use of any specific alternate reference rate.