FINRA reminded broker-dealers to evaluate their LIBOR exposures and prepare for LIBOR cessation.
In a regulatory notice, FINRA highlighted relevant steps firms have undertaken to address LIBOR cessation risks. FINRA based its guidance on the results of a recent survey covering "a representative cross-section of member firms, including some firms with significant trading volume or positions in LIBOR-linked securities."
FINRA asked broker-dealers to consider several questions in connection with the LIBOR phase-out. The questions focus on (i) the identification, measurement and evaluation of risks concerning LIBOR-related transactions; (ii) risks concerning fallback provisions (or the lack thereof); (iii) operational risks (including use of third-party vendors and relevant systems); (iv) training of, and guidance for, associated persons and staff as to impact on customers; and (v) supervision of associated persons' recommendations relating to LIBOR-linked products.
The FINRA survey "found that while some large firms, notably large brokers-dealers affiliated with bank holding companies, had implemented extensive programs to prepare for the phaseout, others had made only limited efforts." FINRA highlighted effective firm practices with respect to (i) governance frameworks to manage the LIBOR phase-out; (ii) identification and classification of financial exposure to interbank offered rates ("IBORs"); (iii) assessing operational risk; (iv) consideration of alternative reference rate options; (v) legal (including contractual) risk; and (vi) staff training and customer education.
Commentary
The FINRA notice is a helpful resource and a must-read, especially for smaller broker-dealers that may not yet have fully engaged in consideration of LIBOR transition matters. It highlights some of the basic preparedness steps and provides a number of examples and methods that have been used by other broker-dealers.
With that said, the survey results do suffer a bit from vagueness. They do not indicate whether any particular practice(s) were more or less common or the types of firms (e.g., large global systemically important bank-type entities or smaller stand-alone broker-dealers) engaging in them. Instead, it generally notes that firms that did [x] did it in [y] manner, without first saying how many or what type of firms did [x] at all.
In addition, at least one of the questions posed by FINRA could be turned back to FINRA. FINRA asks "how is your firm preparing to supervise associated persons' recommendations relating to LIBOR-linked products?" Given that the CFTC has provided fairly broad staff relief from the application of its external business conduct requirements (including suitability requirements) relating to IBOR transition, perhaps FINRA should consider taking similar action so as to help facilitate firms' transition efforts.
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