Federal Agencies and State Regulators Issue Joint Statement on Managing the LIBOR Transition | Practical Law

Federal Agencies and State Regulators Issue Joint Statement on Managing the LIBOR Transition | Practical Law

The FRB, CFPB, FDIC, NCUA, OCC and state bank and credit union regulators issued a joint statement emphasizing the expectation that regulated entities with LIBOR exposure continue progress toward managing their transition away from LIBOR. The statement clarifies supervisory considerations for certain risks associated with the LIBOR, including the meaning of new LIBOR contracts, assessing the appropriateness of alternative reference rates, and the expectations for fallback language.

Federal Agencies and State Regulators Issue Joint Statement on Managing the LIBOR Transition

by Practical Law Finance
Published on 26 Oct 2021 • USA (National/Federal)
The FRB, CFPB, FDIC, NCUA, OCC and state bank and credit union regulators issued a joint statement emphasizing the expectation that regulated entities with LIBOR exposure continue progress toward managing their transition away from LIBOR. The statement clarifies supervisory considerations for certain risks associated with the LIBOR, including the meaning of new LIBOR contracts, assessing the appropriateness of alternative reference rates, and the expectations for fallback language.
On October 20, 2021, the Board of Governors of the Federal Reserve System (FRB), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC), and state bank and credit union regulators issued a joint statement on managing the LIBOR transition.
The joint statement references that in March of 2021, the UK's Financial Conduct Authority (FCA) announced that the one-week and two-month USD LIBOR settings will no longer be published after December 31, 2021. While the publication of the overnight and one-, three-, six-, and 12-month USD LIBOR settings will be extended through June 20, 2023, the joint statement advises that the extension "is not an indication that any of the extended USD LIBOR rates will be subsequently published after June 20, 2023."
According to the joint statement and as the agencies have stated in previous communications and guidance, supervised institutions' failure to adequately prepare for LIBOR's discontinuance could undermine financial stability and institutions' safety and soundness and create litigation, operational, and consumer protection risks. To that end, the joint statement emphasizes that:
  • Supervised institutions with LIBOR exposure are expected to continue to progress toward an orderly transition away from LIBOR.
  • Supervisory focus and review will continue to increase as the LIBOR cessation date approaches.
  • Supervised institutions should develop and implement a transition plan for communicating with customers, clients, and counterparties, and ensure that systems and operational capabilities will be ready for transition to a replacement reference rate after LIBOR's discontinuation.
The joint statement clarifies the meaning of new LIBOR contracts by stating that:
  • Entering into new contracts, including derivatives, that use LIBOR as a reference rate after December 31, 2021 is an action that would create safety and soundness risks.
  • A new contract would include an agreement that creates additional LIBOR exposure for a supervised institution or extends the term of an existing LIBOR contract.
  • A draw on an existing agreement that is legally enforceable would not be viewed as a new contract.
  • Contracts entered into on or before December 31, 2021 should either use a reference rate other than LIBOR or have fallback language providing for the use of a "strong and clearly defined alternative reference rate after LIBOR's discontinuation".
The joint statement clarifies considerations for alternative reference rates by encouraging safe and sound practices which include conducting due diligence to:
  • Ensure alternative rate selections are appropriate for the institution's products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities.
  • Understand how the chosen reference rate is constructed.
  • Be aware of any fragilities associated with that rate and the markets that underlie it.
The joint statement clarifies expectations that fallback language:
  • Identify all contracts that reference LIBOR, lack adequate fallback language, and will mature after the relevant tenor ceases.
  • Include fallback language in new or updated contracts that provides for using a strong and clearly defined fallback rate.