More certainty on the cessation dates have been provided by the market and regulators1 and the initial USD LIBOR cessation dates are now less than a year away. The Office of the Comptroller of the Currency (OCC) previously announced that it intended to take a closer look at the progress being made by banks and financial institutions towards cessation preparedness and the Fed reinforced that with their own statement on March 9th. Early OCC reviews of large and mid-size banks’ transition plans have begun but the OCC has made clear that institutions of all size need to be ready. With that in mind, the OCC has provided a LIBOR self-assessment tool for banks to utilize in assessing the appropriateness of a bank’s Libor transition plan, bank management’s execution of the bank’s transition plan, as well as related oversight and reporting. The Fed’s guidance to examiners (differentiated for banks with less and more than $100 billion in total assets) provides an additional set of principles that institutions should be considering as they manage their transition and prepare for future exams.
LIBOR transition is a colossal undertaking that has multiple implications (legal, technology, risk management, finance, client communication, etc.) to transition new issuances (front book) and convert legacy products (back book) to new ARRs, requiring planning and consistency of execution.
Guidance documents provided cover multiple topics that are all essential for a sound transition. Regardless of whether the regulators have, or will, initiate an exam, financial institutions should perform a health check against the core areas highlighted in the guidance (Exposure Assessment and Monitoring, Replacement Rates Approach, Fallback Language and Methodology, and Program Oversight and Governance. Below are some recommendations to get prepared and to use this guidance to evaluate your LIBOR program.
To effectively complete the self-assessment or a regulatory exam addressing LIBOR, institutions should consider having designated control representatives who will be responsible for collecting the assessment materials and coordinating the overall assessment effort. Consider utilizing your LIBOR Transition Program team for coordination, your Audit team for risk oversight, as well as Regulatory Relations staff for consistent messaging.
Prepare to answer:
Identify points of contact in each impacted line of business or internal operations team who can be responsible for providing supporting documentation, assisting in answering the questions, and supporting follow up requests from regulators when needed. Consistency across the assessment response is important and asking key stakeholders to review all questions at once, instead of individual questions, improves the ability of stakeholders to respond holistically and improves the quality of the overall assessment.
Document, document, document:
As firms work across lines of business to address components of the self-assessment, they should be thinking about how they are capturing centrally both their progress on LIBOR transition efforts, as well as their decision-making criteria and signoffs. In addition to transition plans and status reports, regulators have indicated they want to see documentation of how decisions were made (e.g. how replacement rates were chosen and how fallbacks were assessed). Documenting the decision-making processes while they are ongoing can provide the needed support to respond effectively to these questions.
As a general consideration, the materials that support the self-assessment or an exam response should not be created specifically for regulators. The OCC and the Fed are looking to assess what is currently in place and most supporting materials should already be in existence as a part of a well-run LIBOR transition effort.
Rely on previous assessment exercises:
Most of the LIBOR programs have already undertaken some type of health checks and should rely on these analyses to capture most of the needed information.
Transition program reviews performed by Internal Audit groups or End-to-End LIBOR Gap / Testing Assessments performed by independent consulting firms give an external point of view on progress toward a successful transition.
Monitor risk exposures:
It’s no surprise that the Fed and OCC include several assessment questions about LIBOR exposures. While most institutions have a good understanding of their current on-balance sheet exposures to LIBOR, many institutions may lack a comprehensive view of off-balance sheet exposures that reside in servicing lines of business, derivative and hedging exposures, and other off-balance sheet holdings such as asset management or investments. In addition to current state exposures, firms should do their best to forecast their future exposures based on scenarios / assumptions and monitor anticipated impacts on interest rate and basis risks.
The regulators also made clear in their announcements that they intend to look at transition risk related to third-party-provided products, services, and systems potentially impacting LIBOR exposures. Robust central monitoring of third-parties (servicing platform, contract management, data provider, consulting, outside counsel, etc.) risk and issues, if not already in place, should be integrated into regular exposure reporting discussions to be able to address all parts of the OCC assessment or exam questions.
Monitor your third parties
Regulators have made clear that they intend to look at transition risk related to third-party-provided products, services, and systems potentially impacting LIBOR exposures. Robust central monitoring of third-party (servicing platforms, contract management, data providers, consulting services, outside counsel, etc.) risks and issues, if not already in place, should be integrated into regular exposure reporting.
Get prepared now as regulators begin LIBOR Transition focused exams of financial institutions. Not only does leveraging the self-assessment tool help prepare institutions for potential exams, but it is also good business practice to complete an additional health check that is aligned to a regulatory perspective.
Accenture has helped multiple companies to support, review, assess their LIBOR Transition program as well as prepare for regulatory exams. Accenture has developed impact assessment, program review toolkit, and end-to-end activity testing frameworks to accelerate such efforts.
- FCA Press Release: https://www.bankofengland.co.uk/news/2021/march/announcements-on-the-end-of-libor; IBA Statement: https://www.bankofengland.co.uk/news/2021/march/announcements-on-the-end-of-libor; ARRC Press Release: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2021/ARRC_Press_Release_Endgame.pdf