Important Information Regarding Transition from LIBOR
On October 20, 2021, the Federal Financial Institutions Examination Council ("FFIEC") released a Joint Statement advising financial institutions how to best manage the transition from utilizing the London Interbank Offered Rate ("LIBOR") as a short-term reference rate to price variable rate loans and securities, deposits, borrowings, and interest rate hedging transactions to the use of an alternative rate. The Alternative Reference Rates Committee (ARRC) recommends use of the Secured Overnight Financing Rate (SOFR) (i) by December 31, 2021 for the one-week and two-month U.S. dollar settings and (ii) immediately after June 30, 2023 for the remaining U.S. dollar settings.
The Joint Statement provided several matters that financial institutions should consider regarding the transition from LIBOR. The following action items should assist your institution in its transition. Your financial institution should:
Identify and quantify the risks that will impact your institution so that they can communicate any necessary contract term changes with clients and counterparties. Possible risks may include operational difficulty in quantifying exposure, financial, valuation, and model risks related to reference rate transition, inadequate risk management processes and controls to support the transition, consumer protection-related risks, limited ability of third-party service providers to support operational changes, and potential litigation and reputational risks arising from the reference rate transition.
Review any “fallback language” in your existing financial contracts and ensure that such fallback language is sufficient to account for the discontinuation of the LIBOR rate. Additionally, all new contracts should utilize an alternative reference rate or should ensure that fallback language is sufficiently robust to account for the discontinuance.
Disclose, in advance, any altered contract reference rate terms and “help clients understand how a new reference rate affects their contractual principal and interest payments, APR, and other terms,” which, in some cases, is required by law or the contract.
Consider any third-party service providers that reference or use LIBOR and associated discount curves in their services and assess their ability to accommodate alternative reference rates and mitigate any potential risks incurred.
Be prepared for increased regulatory oversight regarding your institution’s preparedness for LIBOR’s discontinuation.
Review the Ten Steps for LIBOR Transition – A Guide for Financial Institutions.
For additional information or assistance in navigating this transition, please contact Kennedy Sutherland LLP.