Federal Reserve Board ("FRB") Vice Chair Randal Quarles warned financial institutions that there are "safety and soundness" risks associated with the continued use of the London Inter-Bank Offered Rate ("LIBOR") in new transactions after 2021.
In remarks at "The SOFR Symposium: The Final Year," hosted by the Alternative Reference Rates Committee ("ARRC") Mr. Quarles expressed concern at the fact that USD LIBOR use has actually increased over the past three years. He emphasized recent statements by the UK Financial Conduct Authority and ICE Benchmark Administration on LIBOR cessation, making explicit that there should be no "remaining doubts as to exactly when and whether LIBOR will end."
Mr. Quarles highlighted the FRB's recent guidance (see previous coverage), concerning preparation for the transition. This included recommendations that examiners assess whether a firm has (1) established a plan to transition away from LIBOR-based financial products, (2) accurately measured financial exposure and risk, (3) prepared for operational adjustments to internal and vendor-provided systems, (4) identified contracts that reference LIBOR, (5) communicated sufficiently to clients, counterparties and internal stakeholders on the LIBOR transition to comply with the Truth in Lending Act and (6) provided the LIBOR transition plan to management.
Mr. Quarles stated that legislation is a necessary step toward addressing contracts that have no effective means to replace LIBOR upon cessation. He also expressed support for the ARRC-proposed legislation in New York (see previous coverage) that would use ARRC-recommended indices as "appropriate replacements" for LIBOR in financial contracts that otherwise would be "adversely affected" by the transition, and other efforts in Congress that provide legislative solutions.
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