The Federal Reserve Board ("FRB") issued guidance for examiners who will assess supervised firms' LIBOR transition plans.
The FRB warned that "supervised firms that are not making adequate progress in transitioning away from LIBOR could create safety and soundness risks for themselves and for the financial system," and advised that "examiners should consider issuing supervisory findings and other supervisory actions if a firm is not ready to stop issuing LIBOR-based contracts by December 31, 2021."
The FRB recommended that examiners should assess whether the firm has (1) established a plan to transition away from LIBOR-based financial products, (2) accurately measured financial exposure and risk, (3) prepared for the operational adjustments to internal and vendor-provided systems, (4) identified contracts that reference LIBOR, (5) communicated sufficiently to clients on the LIBOR transition to comply with the Truth in Lending Act and (6) provided the LIBOR transition plan to management.
The FRB distinguished between the treatment of supervised firms with less than $100 billion in total consolidated assets and supervised firms with more than $100 billion in total consolidated assets; the latter will generally have more significant and complicated LIBOR exposure and, therefore, should develop a detailed transition plan. For supervised firms with $100 billion or more in consolidated assets, the FRB provided additional guidelines, including that such firms should:
- establish a governance structure and a project roadmap with defined timelines and roles that address: risk management, senior-level oversight, financial impacts and operational gaps, contingencies that may impact the success of the plan, budget and personnel resources, and independent review/internal audit functions;
- accurately and frequently measure financial exposure by product, counterparty and business line, as well as highlight valuation and hedging challenges;
- have a complete inventory of affected systems ranked by criticality, and confirm with service providers that necessary updates will be available before December 31, 2021;
- if the firm is a major user of derivatives, consider adhering to the ISDA IBOR Fallback Protocol;
- implement training for employees to learn how the LIBOR transition will affect their work internally and how to communicate the implications externally; and
- report any significant delays in the plan's progress and, if the supervised firm is a foreign entity, provide updates to the U.S. Chief Risk Officer and the U.S. Risk Committee.
Primary Sources
- SR 21-7: Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR
- Examiner Guidance for Assessing LIBOR Transition Efforts at Firms with Less than $100 Billion in Total Consolidated Assets Supervised by the Federal Reserve
- Examiner Guidance for Assessing LIBOR Transition Efforts at Supervised Firms with $100 Billion or More in Total Consolidated Assets
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