On March 9, 2021, the Board of Governors of the Federal Reserve System from the Division of Supervision and Regulation issued SR 21-7: Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR.1

This Supervision and Regulation letter is applicable to all firms supervised by the Federal Reserve and highlights what Fed examiners may be focusing on as they evaluate preparedness for the LIBOR transition during regularly scheduled Federal Reserve-led examinations.

The Federal Reserve clearly notes that entering into new contracts that reference LIBOR after December 31, 2021 would create safety and soundness risks; and  encourages supervised firms to cease entering such contracts as soon as practicable and in any event by December 31, 2021.

What this means

A part of upcoming regularly scheduled examinations, a focus by examiners could be on LIBOR transition plans and how firms are demonstrating progress towards moving away from referencing LIBOR in new products and transitioning existing contracts. The letter details the factors that examiners should consider, with a focus on six key areas:

  • Transition planning — Does the LIBOR transition plan includes a governance structure that clearly defines roles and responsibilities needed to execute the plan and a project roadmap with defined timelines and milestones?
  • Financial exposure measurement and risk assessment – How are firms measuring its financial exposures to LIBOR, including, but not limited to, investments, derivatives, and loans?
  • Operational preparedness and controls – What actions are being taken to identify and update all internal and vendor-provided systems and models that use or require LIBOR?
  • Legal contract preparedness – How are firms identifying all contracts that reference LIBOR? What steps are in place to refrain from entering into contracts without adequate fallback language.
  • Communication – How are firms communicating to its counterparties, clients, consumers, and internal stakeholders about the LIBOR transition?
  • Oversight and Reporting – How is the overall transition plan overseen and how are timely updates to senior management and the board of directors being conducted?

Guidance is separated for institutions with less than $100 billion in total consolidated assets2 and for institutions with greater than $100 billion in total consolidated assets.3  While the six key focus areas remain consistent across both classifications, reviews may be more narrowly focused for firms with less than $100 billion in total consolidated assets.

Conclusion

We strongly encourage all firms supervised by the Federal Reserve to evaluate their exam preparedness regarding their LIBOR transition programs. SR 21-7 calls out that if supervised firms are not making adequate progress in transitioning away from LIBOR, this could create safety and soundness risks for themselves and for the financial system. SR-17 concludes 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.

How Accenture can help

Accenture can assist clients with exam preparedness and their LIBOR transition program, offering support and leading capabilities in the following areas:

  • Transition Exam Preparedness and Planning
  • Transition Analytics and Reporting
  • Operational Readiness
  • Contract Remediation
  • Conduct Risk Assessment and Framework

References:

  1. https://www.federalreserve.gov/supervisionreg/srletters/SR2107.htm
  2. Examiner Guidance for Assessing LIBOR Transition Efforts at Firms with Less Than $100 Billion in Total Consolidated Assets Supervised by the Federal Reserve
  3. Examiner Guidance for Assessing LIBOR Transition Efforts at Supervised Firms with $100 Billion or More in Total Consolidated Assets

Other Accenture related blogs:

LIBOR – Get prepared for regulatory exams 6 April 2021
ARRC Commends Decisions Outlining the Definitive End for LIBOR 16 March 2021
SEC issues risk alert on LIBOR preparedness 17 July 2020

 

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