On July 29th, 2021, the Alternative Reference Rates Committee (ARRC) and the Office of the Comptroller of the Currency (OCC) published guidance on the LIBOR transition. The ARRC formally recommended the Chicago Mercantile Exchange (CME) Group’s forward looking Secured Overnight Financing Rate (SOFR) Term Rates, and the OCC addressed the continued regulatory capital eligibility of capital instruments that a financial institution replaces or amends as a result of the transition from LIBOR.

What this means

The ARRC’s formal recommendation of SOFR Term Rates is a major milestone in the transition away from U.S. Dollar (USD) LIBOR, and marks the completion of the Paced Transition Plan outlined by the ARRC in 2017.

The continued growth in SOFR cash and derivatives markets has allowed the ARRC to recommend these rates, consistent with the principles it established in the Paced Transition Plan. This formal recommendation follows the ARRC’s July 21st, 2021, announcement of conventions and best practices for the use of SOFR Term Rates. These can all be referenced when market participants use SOFR Term Rates in legacy fallbacks and new contracts to prepare for the LIBOR cessation.

“With this step, market participants now have every tool they need to transition from LIBOR,” said Randal Quarles, Vice Chair for Supervision of the Federal Reserve Board and Chair of the Financial Stability Board. “All firms should be moving quickly to meet our supervisory guidance advising them to end new use of LIBOR this year.”

 Additionally, the OCC published two Frequently Asked Questions (FAQs) on replacing or amending the terms of a capital instrument to transition from LIBOR to an alternative reference rate be considered the issuance of a new instrument, and would it be considered creating an incentive to redeem the instrument, under the existing capital rule 12 CFR 3.

Firstly, the OCC does not consider the replacement or amendment of a capital instrument that solely replaces a reference rate linked to LIBOR with an alternative rate to constitute an issuance of a new capital instrument. A financial institution that replaces or amends the terms of a capital instrument should however support its determination with analysis that demonstrates that the replacement instrument is not substantially different from the original from an economic perspective.

Secondly, the OCC does not consider the replacement or amendment of a capital instrument to be creating an incentive to redeem such instrument, as long as the replacement instrument is not substantially different from the original LIBOR benchmarked instrument. Again, financial institutions should support this determination with appropriate analysis.

Conclusion

The guidance from both the ARRC and the OCC provides further clarity in the LIBOR transition.

“This formal recommendation of SOFR Term Rates is an achievement for the USD LIBOR transition specifically and for financial stability overall.” Said Tom Wipf, ARRC Chair, “With just five months until no new LIBOR, significant work remains and I urge everyone with LIBOR exposures to immediately take action and base their new contracts on forms of SOFR.”

References

  1. ARRC Formally Recommends Term SOFR https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Term_SOFR.pdf
  2. LIBOR Transition: Regulatory Capital Rule FAQs https://www.occ.gov/news-issuances/bulletins/2021/bulletin-2021-32.html

Newsletter Author: Venetia Woo, Mairi Bryan
Newsletter Contact Person:
Venetia Woo

Disclaimer

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.

About Accenture

Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 500,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Its home page is www.accenture.com

Copyright © 2021 Accenture. All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.

If you require advice or further details on any matters referred to, please contact your Accenture representative.

Submit a Comment

Your email address will not be published. Required fields are marked *