Group updates steps to take in face of LIBOR demise

(June 4, 2021) Steps that should be taken now and through the rest of the year by those with exposure to the soon-to-be-defunct LIBOR are outlined in a “roadmap” issued this week by the Financial Stability Board (FSB), an international group of financial regulators.

In its “Global Transition Roadmap for LIBOR,” FSB stated that continued reliance of global financial markets on the London Interbank Offered Rate reference rate “poses clear risks to global financial stability.” LIBOR has been a widely used reference rate for such financial products as adjustable-rate mortgages and student loans (especially at credit unions, according to NCUA). The FSB is made up of regulators from several countries, including the U.S. Federal Reserve. Board Vice Chair for Supervision Randal Quarles chairs the group.

The steps outlined in the roadmap (referred to as the GTR), the FSB said, are considered “prudent steps to take to ensure an orderly transition by end-2021” and are intended to supplement existing industry and regulatory timelines and milestones.

Among the steps that the roadmap recommends that firms should already have taken to prepare for LIBOR’s demise are:

• Identification and assessment of all existing LIBOR exposures, including understandings of which LIBOR settings place a continuing reliance on the firm after end-2021, by currency and tenor, and; what fallback arrangements those contracts currently have in place.
• Identification of other dependencies on LIBOR outside of its use in financial contracts – for example, use in financial modelling, discounting and performance metrics, accounting practices, infrastructure, or non-financial contracts (e.g. in late-payment clauses).
• Agreement on a project plan, including specific timelines and resources to address or remove any LIBOR reliance identified, to transition in advance of the end of 2021 including clear governance arrangements.

The steps also include those that should be taken by mid-year, by year-end and by June 2023 (for those firms that are winding down legacy contracts).

In addition to the GTR, FSB also released:

• A paper reviewing overnight risk-free rates and term rates;
• A statement on the use of the ISDA spread adjustments;
• A statement encouraging authorities to set “globally consistent expectations that regulated entities should cease the new use of LIBOR in line with the relevant timelines for that currency, regardless of where those trades are booked.”

LINKS:
Global Transition Roadmap for LIBOR

FSB issues statements to support a smooth transition away from LIBOR by end 2021