Federal Agencies Release Joint Statement on Managing LIBOR Transition | Goodwin

REGULATORY DEVELOPMENTS

FEDERAL AGENCIES ISSUES JOINT STATEMENT ON LIBOR TRANSITION MANAGEMENT

On October 20, regulators of federal financial institutions, working with regulators of state banks and credit unions, issued a statement stressing the importance of an orderly transition away from LIBOR. In addition, the statement includes clarifications regarding the new LIBOR contracts, considerations when assessing the suitability of alternative benchmarks, and fallback language expectations. The statement warns that failure to adequately prepare for the LIBOR shutdown could damage financial stability, security and the soundness of institutions and create risks of litigation, exploitation and consumer protection.

LIBOR TRANSITION: UPDATED SELF-ASSESSMENT TOOL FOR BANKS

On October 18, the OCC released an updated self-assessment tool for banks to assess their preparation for LIBOR termination. While banks can use any replacement rate they deem appropriate for their funding model and the needs of their clients, OCC’s supervisory efforts will initially focus on non-SOFR rates. Bank management should adapt the bank’s risk management process to the size and complexity of the bank’s LIBOR exposures

Bank management should use the updated self-assessment tool to assess whether:

  • The rate always reflects the competitive forces of supply and demand and is anchored by a sufficient number of observable arm’s length transactions, under all market conditions, including periods of stress;
  • The historical data underlying the rate is extensive, covering a variety of economic conditions;
  • The rate administrator maintains a sustainable governance methodology and processes to ensure the quality and integrity of the benchmark during periods of market stress;
  • The transparency of the rate offers market participants the ability to understand the methodology, allowing them to independently justify the published rates; and
  • The market for financial instruments using the rate is sufficiently liquid to allow effective management of market risk.

New or modified financial contracts should have fallback language allowing efficient replacement of tariffs clearly identified in the contractual conditions. Bank management should consider and prepare for all applicable risks such as operational, compliance, strategic and reputational risks when defining and performing LIBOR termination readiness assessments.

CFTC INTEREST RATE REFORM SUB-COMMITTEE SELECTS NOVEMBER 8 FOR SOFR FIRST FOR NON-LINEAR DERIVATIVES

As part of MRAC’s first SOFR initiative, inter-professional brokers will be encouraged to replace non-linear USD derivative trading agreements with SOFR from November 8. negotiable form and ISDA issues updated settlement provisions for the USD SOFR ICE swap rate. While brokers can still execute USD LIBOR nonlinear derivatives with clients after November 8, 2021, guidelines from U.S. banking regulators state that brokers should stop entering into new contracts using USD LIBOR as the benchmark rate as soon as possible. and in any event by December 31, 2021. For the purposes of SOFR First, non-linear USD derivatives include swaptions, caps and floors. Other products such as exotic options, Bermudan options and constant maturity swaps are not included and may continue to be traded on the inter-professional market after November 8, 2021. The fourth and final phase of SOFR First will concern traded derivatives on the stock market with a timetable to be determined.

FINCEN RELEASES REPORT ON RANSOMWARE TRENDS IN BANK SECRET ACT DATA

On October 15, FinCEN released a Financial Trends Analysis (FTA) identifying ransomware as a particularly acute cybercrime problem and a growing threat to the U.S. financial sector, businesses and the public, with recent attacks targeting various sectors, including manufacturing, law, insurance, health care. , energy, education and the food supply chain in the United States and around the world. The FTA reported rapid growth in ransomware SARs filed monthly between January and June 2021, up 30% from the total SARs filed in the entire 2020 calendar year, and identified bitcoin as the most common ransomware-related payment method in reported transactions. The FinCEN FTA ends with recommendations for the detection and mitigation of ransomware attacks.

DOL PROPOSES A RULE TO REMOVE ESG BARRIERS IN PLAN MANAGEMENT

On October 13, the US Department of Labor announced a proposed rule that would remove barriers to the ability of plan trustees to consider climate change and other environmental, social and governance (ESG) factors when select investments and exercise shareholders’ rights. ERISA Trustees are expected to act in the best interests of plan participants and beneficiaries. Under the Trump administration, ERISA’s trustees were allowed to select investments solely on the basis of pecuniary factors and were prohibited from adding or keeping any investment fund, product or portfolio if that fund, product or portfolio reflected non-monetary investment objectives or strategies. . The rule proposed by the DOL aims to remedy the additions of the Trump era by allowing ERISA trustees to assess the economic effects of ESG factors on any particular investment. The comment period runs for 60 days after posting in the Federal Register.

“A main idea behind the proposal is that climate change and other ESG factors can be financially significant and, when they are, considering them will inevitably lead to better risk-adjusted returns in the long run, protecting the economy. retirement savings for American workers. ”
– Acting Assistant Secretary of Employee Benefits Security Administration Ali Khawar

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