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Federal Reserve Board Releases Additional LIBOR Transition FAQs
Practical Law Legal Update w-033-7327 (Approx. 4 pages)
Federal Reserve Board Releases Additional LIBOR Transition FAQs
by Practical Law Finance
| Published on 13 Dec 2021 • USA (National/Federal) |
On November 19, 2021, the Board of Governors of the Federal Reserve System released additional answers to frequently asked questions on LIBOR transition. The guidance is applicable to financial institutions under the supervision of the Federal Reserve, including those with 10 billion or less in consolidated assets.
On November 19, 2021, the Board of Governors of the Federal Reserve System (FRB) released revised Supervision and Regulation Letter SR 21-12 and Attachment B to SR Letter 21-12 (November SR 21-12) relating to additional answers to frequently asked questions (FAQs) on LIBOR transition. FAQs on LIBOR transition were first addressed in Attachment A to SR Letter 21-12, with an effective date of July 29, 2021. The guidance is applicable to financial institutions under the supervision of the Federal Reserve, including those with 10 billion or less in consolidated assets.
The November SR 21-12 includes seven FAQs that, among other things, clarify:
- That a loan contract that automatically renews after December 31, 2021 would be viewed as a new contract (see Question 2).
- There are limited circumstances in which it would be appropriate for Board-supervised institutions to enter any new USD LIBOR contracts after December 31, 2021. Examples include market making in support of client activity related to USD LIBOR transactions executed before January 1, 2022, and certain transactions that reduce or hedge USD LIBOR exposure on contracts entered into before January 1, 2022 (see Question 4).According to the November SR 21-12, "A Board-supervised institution should have reasonable measures in place to assess whether a new USD LIBOR contract would be consistent with safety and soundness practices. These measures should align with the institution's existing risk management processes."
- After December 31, 2021, it would be appropriate for Board-supervised institutions to engage in secondary trading of LIBOR-linked cash instruments issued prior to year-end 2021 (see Question 5).
- LIBOR contracts entered into by Board-supervised institutions on or before December 31, 2021 should either use a reference rate other than LIBOR or have fallback language that provides for use of a strong and clearly defined alternative reference rate after LIBOR's discontinuation (see Question 6).
- How examiners will assess Board-supervised institutions' LIBOR transition planning, and whether supervisors will issue MRAs and take other supervisory actions in connection with the LIBOR transition (see Question 7).In line with the FRB's 'Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR' letter, SR 21-7, examiners first assess whether a Board-supervised institution has exposure to LIBOR. For institutions with LIBOR exposure, examiners have focused on:
- transition planning;
- financial exposure measurement and risk assessment;
- operational preparedness and controls;
- legal contract preparedness;
- communication; and.
- oversight.
According to the November SR 21-12, "Board-supervised institutions that are not making adequate progress toward transitioning away from LIBOR could create safety and soundness risks for themselves and for the financial system. Accordingly, examiners will consider issuing supervisory findings and other supervisory actions if a firm is not making adequate progress."
For more detail on the FAQs, see the November SR 21-12.
In a release from the Loan Syndications and Trading Association (LSTA) dated November 29, 2021 related to the November SR 21-12, the LSTA noted two items of interest that were not addressed by the FRB letter:
- Whether extensions in LIBOR under uncommitted lines would be permissible in 2022. According to the LSTA, regulators have generally indicated that they do not consider uncommitted lines to be pre-existing contractual obligations, although banks continue to push for this.
- Some loans underwritten in LIBOR in 2021 that are not distributed until 2022. According to the LSTA, regulators understand that a few of these might occur.
As noted in the November SR 21-12, the FRB may continue to periodically update the FAQs with further LIBOR transition guidance.