January 24, 2020

LIBOR Phaseout: NYDFS Now Requires a Plan and Other Regulators Are Watching

3 min

In December 2019, the New York Department of Financial Services (NYDFS) issued an Industry Letter requesting assurance that its regulated institutions have developed an appropriate plan to manage the transition away from the London Inter-bank Offered Rate (LIBOR). NYDFS-regulated institutions must submit risk management plans to address LIBOR cessation and transition risks.

According to NYDFS, each LIBOR cessation plan should describe:

  • Programs that would identify, measure, monitor, and manage all financial and non-financial risks of transition;
  • Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates, for both the institution and its customers and counterparties;
  • Processes for communications with customers and counterparties;
  • A process and plan for operational readiness, including related accounting, tax, and reporting aspects of such a transition; and
  • The governance framework, including oversight by the board of directors or the equivalent governing authority, of the regulated institutions.

The NYDFS is not the only regulator focused on managing the transition, and all financial institutions should be prepared to minimize disruption and potential harm.

The federal banking regulators have been pushing financial institutions to find LIBOR alternatives. In its Fall 2019 Semiannual Risk Perspective, the Office of the Comptroller of the Currency (OCC) noted that examiners will evaluate bank awareness and preparedness for the LIBOR transition. Meanwhile, in a June 2019 speech, Federal Reserve Board Vice Chair for Supervision Randal Quarles stated that the Fed would use a tailored supervisory approach and that larger firms should expect to see their "expectations increase."

Meanwhile, the Federal Housing Finance Agency issued a Supervisory Letter to the Federal Home Loan Banks prohibiting them from entering or purchasing LIBOR-based investments, financial assets, liabilities, and derivatives that mature after December 31, 2021. The SEC also published a statement encouraging market participants to actively prepare for the risks associated with the discontinuation and transition.

Widespread preparations are critical, given that an estimated $200 trillion in financial products is linked to LIBOR. Market participants who are not adequately prepared for the transition may face legal, reputational, and operational risks. Financial regulators in the UK have stressed that LIBOR will cease to exist after 2021 and have said that banks are not moving fast enough to make the transition.

In the United States, the Alternative Reference Rates Committee (ARRC), a working group of private sector market participants convened by the Federal Reserve Board and the Reserve Bank of New York, selected the Secured Overnight Financing Rate (SOFR) to replace LIBOR. SOFR measures the cost of borrowing cash overnight through repo transactions, which are collateralized with U. S. Treasury securities. Although many newly issued securities reference SOFR, which the Fed began publishing in April 2018, numerous LIBOR-linked legacy transactions remain.

NYDFS-regulated institutions must respond with their transition plans by February 7, 2020. Other financial institutions should be aware that the December 2021 deadline is approaching—23 months is a relatively short time to complete what likely will be a complicated process—and they should be developing their own LIBOR plans. If your institution does not have a transition plan, the NYDFS model is a good place to start.