To make sure that things are moving along as they should, the SEC’s Office of Compliance Inspections and Examinations (OCIE) quietly released a Risk Alert, “Examination Initiative: LIBOR Transition Preparedness,” on June 18 that reminds people that the OCIE is happy to inspect your firm’s progress.
The global push to move away from the London Interbank Offered Rate (LIBOR) reference rate/benchmark to its more robust and safer replacement the Secured Overnight Finance Rate (SOFR) appears to be moving full steam ahead for many financial services firms in the U.S. (Reference rates are essential for corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives, reminds the alert.)
U.S. regulators are not mandating when the transition should happen for U.S. firms. But industry groups and authorities want firms to stay on track to start breaking away during 2021 and 2022, if need be, regardless of the pandemic and the resulting economic crash.
“Preparation for the transition away from LIBOR is essential for minimizing any potential adverse effects associated with LIBOR discontinuation,” according to the alert. “The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner.”
OCIE officials note that the Alternative Reference Rates Committee (ARRC) and “working groups across the globe” are there to help firms achieve a successful transition.
“The discontinuation of LIBOR, currently expected to occur after 2021, could have a significant impact on the financial markets and may present a material risk for certain market participants, including SEC-registered investment advisers, broker-dealers, investment companies, municipal advisors, transfer agents and clearing agencies (collectively, ‘registrants’).”
OCIE officials have said that successful LIBOR transitions are “an examination program priority for FY 2020” and that OCIE will be assessing “preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate.”
The Risk Alert offers details “about the scope and content of these examinations” and notes that OCIE will examine “a variety of registrant types … Among other things, OCIE will review whether and how the registrant has evaluated the potential impact of the LIBOR transition on the organization’s: (i) business activities; (ii) operations; (iii) services; and (iv) customers, clients, and/or investors.”
For an OCIE exam, staff will review:
- “The firm’s and investors’ exposure to LIBOR-linked contracts that extend past the current expected discontinuation date, including any fallback language incorporated into these contracts;”
- “The firm’s operational readiness, including any enhancements or modifications to systems, controls, processes, and risk or valuation models associated with the transition to a new reference rate or benchmark;”
- “The firm’s disclosures, representations, and/or reporting to investors regarding its efforts to address LIBOR discontinuation and the adoption of alternative reference rates;”
- “Identifying and addressing any potential conflicts of interest associated with the LIBOR discontinuation and the adoption of alternative reference rates;”
- And “Clients’ efforts to replace LIBOR with an appropriate alternative reference rate.”
The alert has an appendix that has “a sample list of requests for information that OCIE may use in conducting examinations” that has 20 items on it.
OCIE is also “encouraging registrants and investment professionals” to become familiar with the ARRC website: https://nyfed.org/2B2QdWJ and to take part in discussions via e-mail at LIBOR@sec.gov The full text of the alert can be found here: https://bit.ly/2A3viC8
In addition, we at FTF are proud to say that we just completed the first in our online, virtual “Coffee Break” sessions, which just happened to focus on “Life After LIBOR.”
Here’s a link to that free discussion https://bit.ly/2ZbruXX , which featured Jaime Madell, a partner at Kirkland & Ellis LLP; Tara McCloskey, head of derivatives middle office at MetLife; and Chris McAlister, managing director, global head of derivatives trading at Prudential Financial.