Leaving LIBOR – What Your Institution Should Be Doing Now

RMA and the International Association of Credit Portfolio Managers (IACPM) presented an informative Risk Readiness Briefing, Leaving LIBOR, featuring Thomas Wipf, ARRC Chair and Vice Chairman of Institutional Securities, Morgan Stanley and RMA’s Fran Garritt, Director of Securities Lending and Market Risk.

Wipf outlined the Alternative Reference Rates Committee’s (ARRC) recently released best practices and timelines to help financial institutions meet the deadline of the end of LIBOR as a global benchmark rate on December 31, 2021.

The ARRC’s best practices outline a set of key recommended transition milestones that market participants should aim to achieve across floating rate notes, business loans, consumer loans, securitizations, and derivatives. These milestones, as well as the internal planning recommendations that the ARRC suggests for all relevant organizations, are grounded in the ARRC’s core guidance for preparing for the transition:

  • To the extent not already utilized, new USD LIBOR cash products should include ARRC-recommended, or substantially similar, fallback language as soon as possible.
  • As previously announced, third-party technology and operations vendors relevant to the transition should complete all necessary enhancements to support SOFR by the end of this year.
  • New use of USD LIBOR should stop with timing depending on specific circumstances in each cash product market. Deadlines range from December 31, 2020-September 30, 2021 depending on the product.
  • For contracts specifying that a party will select a replacement rate at their discretion following a LIBOR transition event, the determining party should disclose their planned selection to relevant parties at least six months prior to the date that a replacement rate would become effective.

Wipf also discussed timelines for when institutions should take active steps to meet the timelines set out in the recommended transition milestones. For the following products, institutions should start using fallback language by the following dates: floating rate notes by June 30, 2020; business loans by September 30, 2020; mortgage loans by June 30, 2020; student loans by September 30, 2020; securitizations by June 30, 2020; and derivatives no later than four months after the Amendments to ISDA 2006 Definitions are published.

Institutions should have clear internal programs in place to prepare for a transition away from USD LIBOR, including a rigorous assessment of exposures. The ARRC’s Practical Implementation Checklist for SOFR Adoption (Checklist) offers more detailed guidance and background. Additional information can be found on the ARRC website at https://www.newyorkfed.org/arrc.

For more information, listen to the recording available for download here.

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