Special Alert | LIBOR Transition: Anticipate supervisory findings and actions

FRB issued updated guidance related to the transition away form LIBOR

Amy S. Matsuo

Amy S. Matsuo

Principal and National Leader, Regulatory Insights, KPMG US

+1 919-244-0266

The Federal Reserve Board has issued guidance relevant to all of its supervised institutions instructing examiners to consider issuing supervisory findings and other supervisory actions if a firm is not ready to stop issuing LIBOR-based contracts by December 31, 2021. Failure to adequately progress toward a transition away from LIBOR could create safety and soundness risks for the firm and the financial system more generally.

Examiners will look for supervised firms to demonstrate progress towards a move away from referencing LIBOR by considering six key areas:

  1. transition planning
  2. financial exposure measurement and risk assessment
  3. operational preparedness and controls
  4. legal contract preparedness
  5. communication
  6. oversight. 

The Federal Reserve encourages supervised firms to cease entering into such contracts as soon as practicable. New LIBOR-based contracts entered into before December 31, 2021 should have robust fallback language that includes a clearly defined alternative reference rate after LIBOR is no longer available.

Separate examiner guidance is provided for institutions with less than $100 billion in total consolidated assets and those with $100 billion or more in total consolidated assets, which generally will have more significant and complex LIBOR exposures and should develop more detailed transition plans. 

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, the regulator of LIBOR, confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

  • Immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month USD settings
  • Immediately after June 30, 2023, in the case of USD overnight and 1, 3, 6, and 12-month settings.

The Federal Reserve noted that the extension of certain LIBOR tenors until June 30, 2023 will allow some existing LIBOR exposures to mature naturally. Firms should have the ability to identify the proportion of their LIBOR exposure that will run off before the relevant tenor ceases (either December 31, 2021 or June 30, 2023) and should be able to highlight valuation and hedging challenges resulting from switching from LIBOR to an alternative rate.

The Federal Reserve, along with the OCC and FDIC, issued a joint statement in November 2020 encouraging their supervised institutions to transition away from USD LIBOR as soon as practicable, and in any event by December 31, 2021. KPMG Regulatory Insights Special Alert on that release is available here

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