The Federal Reserve has issued guidance to assist examiners in assessing supervised firms’ progress in preparing for the London Interbank Offered Rate (LIBOR) transition.
The interagency statement notes that entering into new contracts that reference LIBOR after 31 December 2021 would create “safety and soundness risks”.
In its letter, the Fed encourages its supervised firms to cease entering into such contracts as soon as practicable.
The extension of certain LIBOR tenors until 30 June 2023 will allow some existing LIBOR exposures to mature naturally, says the Fed.
“Examiners should review supervised firms’ planning for, and progress in, moving away from LIBOR during examinations and other supervisory activities in 2021. Supervised firms should demonstrate progress towards moving away from referencing LIBOR in new products,” says the Fed.
According to the central banking system of America, examiners should consider in assessing six key aspects of transition efforts including transition planning, financial exposure measurement and risk assessment, as well as operational preparedness and controls.
Further to this, examiners should consider legal contract preparedness, communication, and oversight.
“Supervised firms that are not making adequate progress in transitioning away from LIBOR could create safety and soundness risks for themselves and for the financial system. Accordingly, examiners should consider issuing supervisory findings and other supervisory actions if a firm is not ready to stop issuing LIBOR-based contracts by 31 December 2021,” the Fed comments.
In addition to examination work, the Federal Reserve is working with both domestic and foreign supervisors, sharing information and discussing LIBOR transition preparedness in supervisory colleges and other forums as the global effort to transition away from LIBOR by 31 December 2021 continues.
Earlier this month, the Financial Conduct Authority (FCA) revealed the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available.
The Bank of England and FCA urged market participants to continue to take the necessary action to ensure they are ready.
The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the one-week and two-month US dollar settings.
