FHFA releases guidance on alternative reference rates

Federal Issues FHFA LIBOR FHLB

On July 1, FHFA issued a supervisory letter providing guidance to the Federal Home Loan Banks (FHLBanks) regarding Division of Bank Regulation expectations on the use of alternative reference rates to ensure ongoing “safe and sound FHLBank operations.” According to the letter, FHLBanks should consider, among other things, whether the reference rate: (i) is based on actual daily market transactions; (ii) accurately correlates with the bank’s funding costs; and (iii) is considered the most robust or reflective option of market activity available. In addition, the letter advises FHLBanks to consider whether they have the “necessary information about the underlying transactions and methodology supporting a candidate reference rate to monitor its representativeness over time.” The letter advises that FHLBanks should avoid “rates that contain shortcomings that exist in LIBOR and other recently discontinued or soon to be discontinued reference rates.” FHFA also instructs FHLBanks to provide advance notice to their Examiners-in-Charge if they intend to use an alternative reference rate not already in use.