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  • Agencies call for "robust" alternate reference rates

    Agency Rule-Making & Guidance

    On June 11, the Treasury Department, OCC, SEC, and the FDIC released separate statements following the meeting of the Financial Stability Oversight Council concerning the LIBOR transition. Acting Comptroller of the Currency Michael Hsu said it is “imperative that banks continue careful planning” for the transition away from LIBOR to an alternate reference rate, such as the Secured Overnight Financing Rate (SOFR), the Alternate Reference Rates Committee’s (ARRC) preferred LIBOR alternative. As previously covered by InfoBytes, the ARRC released the SOFR “Starter Kit” in August 2020, which includes three factsheets that are the result of a series of educational panel discussions held by ARRC. The various panel discussions were designed to educate on “the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.” SEC Chairman Gary Gensler also expressed support for SOFR, calling it a “preferable” alternate rate. In addition, Gensler shared his concerns regarding the Bloomberg Short-Term Bank Yield Index (BSBY), which some commercial banks are advocating as a replacement for LIBOR. Gensler said the BSBY is based upon unsecured, term, bank-to-bank lending, which is like LIBOR. Treasury Secretary Janet Yellen encouraged market participants to “act promptly to support the switch in derivatives from LIBOR to SOFR.” She noted that “[w]hile important progress is being made in some segments of the market, other segments, including business loans, are well behind where they should be at this stage in the transition.” FDIC Chairman Jelena McWilliams pointed out that the “FDIC continues to focus on the LIBOR transition and to assess institutions’ practices and plans to adopt a replacement rate and address legacy contracts before December 31 of this year.” However, she disclosed that “the FDIC does not endorse any particular alternative reference rate.”

    Agency Rule-Making & Guidance Department of Treasury OCC Securities and Exchange Commission FDIC LIBOR SOFR ARRC Of Interest to Non-US Persons

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  • New York enacts LIBOR replacement provisions

    State Issues

    On April 6, the New York Governor signed S297B into law, which addresses the permanent discontinuance of LIBOR for specified contracts, securities, and other instruments that are economically tied to LIBOR. Among other things, S297B stipulates that contracts using LIBOR as a benchmark that do not contain adequate interest rate fallback provisions (or contain a fallback provision “that result[s] in a benchmark replacement, other than a recommended benchmark replacement, that is based in any way on any LIBOR value”) will automatically convert to the “recommended benchmark replacement”—currently the secured overnight financing rate (SOFR)—when LIBOR is no longer available. As previously covered by InfoBytes, all sterling, euro, Swiss franc and Japanese yen settings, and one-week and two-month U.S. dollar settings will cease immediately after December 31, 2021, while all remaining U.S. dollar settings will cease immediately after June 30, 2023. Of note, S297B will not override LIBOR replacements that are mutually agreed upon by contracting parties, and provides a safe harbor from liability for parties that use a recommended benchmark replacement. Further, parties are also prohibited from discharging or refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement.

    Find continuing InfoBytes coverage on LIBOR here.

     

    State Issues State Legislation LIBOR SOFR

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  • ARRC not yet in a position to recommend forward-looking SOFR term rate

    Federal Issues

    On March 23, the Alternative Reference Rates Committee (ARRC) announced that it “will not be in a position to recommend a forward-looking Secured Overnight Financing Rate (SOFR) term rate by mid-2021.” Additionally, ARRC noted that it cannot guarantee that it will be able to recommend an administrator to produce a robust forward-looking term rate by the end of 2021, when certain LIBOR U.S. dollar settings cease being published (covered by InfoBytes here). ARRC “encourage[d] market participants to continue to transition from LIBOR using the tools available now,” such as the SOFR averages and index data and ARRC’s A User’s Guide to SOFR, and “not to wait for a forward-looking term rate for new contracts.”

    Federal Reserve Board Vice Chair for Supervision Randal K. Quarles also discussed “safety and soundness risks associated with the continued use of USD LIBOR in new transactions after 2021.” Speaking at “The SOFR Symposium: The Final Year” hosted by ARRC, Quarles expressed concerns that use of USD LIBOR has actually increased over the past three years, and emphasized that there should be no “remaining doubts as to exactly when and whether LIBOR will end.” Among other things, Quarles also highlighted a recent Fed supervisory letter (covered by InfoBytes here), which provides supervisory guidance for examiners to consider when assessing an institution’s plan to transition away from LIBOR.

    Find continuing InfoBytes coverage on LIBOR here.

    Federal Issues ARRC LIBOR SOFR

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  • FHA removes LIBOR benchmark for adjustable-rate HECMs

    Federal Issues

    On March 11, FHA issued Mortgagee Letter (ML) 2021-08 announcing changes for adjustable interest rate home equity conversion mortgages (HECMs) as the market transitions away from LIBOR. Among other things, ML 2021-08 (i) removes approval for using the LIBOR index for adjustable interest rate HECMs; and (ii) approves the use of the Secured Overnight Financing Rate (SOFR) index, permitting “mortgagees to commingle index types for newly originated annual adjustable interest rate HECMs when establishing the expected average mortgage interest rate using the U.S. Constant Maturity Treasury” and SOFR index. ML 2021-08 also states that LIBOR-based HECMs must close on or before May 3 to be eligible for FHA insurance.

    Find continuing InfoBytes coverage on LIBOR here.

    Federal Issues HUD FHA Mortgages HECM LIBOR SOFR

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  • Agencies issue joint statement on LIBOR transition

    Federal Issues

    On November 6, the OCC, the Federal Reserve Board, and the FDIC issued a statement reiterating that the agencies do not intend to recommend a specific credit-sensitive rate for use in place of LIBOR. The agencies recommend that financial institutions “use any reference rate for its loans that the bank determines to be appropriate for its funding model and customer needs” and emphasize the need for fallback language in lending contracts that provide for the “use of a robust fallback rate if the initial reference rate is discontinued.” The agencies note that examiners will not criticize banks solely regarding their choice of reference rate, including a credit-sensitive rate other than Secured Overnight Financing Rate (SOFR) (the rate recommended by the Alternative Reference Rates Committee). Additionally, the agencies encourage financial institutions to reach out to lending customers to ensure they are prepared for the transition and to consider any technical changes to internal systems that might be needed to accommodate a new reference rate.

    As previously covered by InfoBytes, in July, the member agencies of the Federal Financial Institutions Examinations Council (FFIEC) issued a joint statement highlighting several risks that will result from the anticipated cessation of LIBOR at the end of 2021 and discussing the supervisory impacts of the LIBOR transition.

    Federal Issues OCC Federal Reserve FDIC LIBOR SOFR ARRC

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  • Federal agencies will not recommend specific LIBOR replacement rate

    Federal Issues

    On October 21, a group of U.S. financial agencies wrote to the executives of financial institutions that participated in the Credit Sensitivity Group workshops, stating that the agencies do not intend to recommend a specific credit-sensitive rate for use in commercial lending products in place of LIBOR. The letter states that “[t]he transition away from LIBOR is a significant and complex undertaking,” and there are multiple suitable alternative reference rates to replace LIBOR. The letter acknowledges that the use of the Secured Overnight Financial Rate (SOFR), which is recommended by the Alternative Reference Rates Committee is “voluntary.” After participating in the workshops, the agencies concluded that they are “not well positioned to adjudicate the selection of a reference rate between banks and their commercial customers” due to various business needs and terms of commercial loans that are based on the negotiation of banks and borrowing parties. Thus, the letter states, the agencies will continue to convene additional working sessions to highlight innovation in the credit-sensitive rates and explore implementing solutions for commercial loans transitioning away from LIBOR.

    For continuing InfoBytes covering on the LIBOR transition see here.

    Federal Issues LIBOR SOFR ARRC Federal Reserve CFTC OCC FDIC

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  • ARRC updates fallback language for bilateral business loans

    Federal Issues

    On August 27, the Alternative Reference Rates Committee (ARRC) released updated recommended fallback language for market participants to use for new originations of LIBOR-referenced bilateral business loans. The proposed language is intended to align with revisions made to the recommended fallback language for syndicated loans (covered by InfoBytes here). The updated fallback language amends the previously proposed “hardwired” and the “hedged loan” approaches. ARRC emphasizes that “cash markets will benefit by adopting a more consistent, transparent and resilient approach to contractual fallback arrangements for new LIBOR products,” and reminds financial market participants that it does not recommend waiting “until a forward-looking term [Secured Overnight Financing Rate] SOFR exists to begin using SOFR in cash products.”

    Federal Issues ARRC LIBOR SOFR Lending

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  • ARRC releases transition guides for ARMs, private student loans referencing LIBOR

    Federal Issues

    On August 18, the Alternative Reference Rates Committee (ARRC) released reference rate transition guides for adjustable-rate mortgages (ARMs) and variable rate private student loans that reference LIBOR. Both guides are intended to support the transition from LIBOR to an alternative reference rate, such as the Secured Overnight Financing Rate (SOFR), and focus on LIBOR-based contracts that will continue to exist after LIBOR’s anticipated cessation at the end of 2021. The LIBOR ARM Transition Resource Guide and the LIBOR-Based Private Student Loan Transition Resource Guide cover key milestones, suggested readiness timeframes, transition risks, and stakeholder impacts, and include various resource guidance, tools, and templates to assist institutions in “fortify[ing] their products and support[ing] consumers’ transitions to SOFR.”

    Find continuing InfoBytes coverage on LIBOR here.

    Federal Issues ARRC LIBOR SOFR Of Interest to Non-US Persons Adjustable Rate Mortgage Student Lending

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  • ARRC releases “SOFR Starter Kit”

    Federal Issues

    On August 7, the Alternative Reference Rates Committee (ARRC) released the “Secured Overnight Financing Rate (SOFR) Starter Kit,” which includes three factsheets that are the result of a series of educational panel discussions held by ARRC in July and August. The various panel discussions were designed to educate on “the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR.” Highlights of the three factsheets include (i) background on LIBOR and the selection of SOFR; (ii) key facts on SOFR, including how it works and common misconceptions; and (iii) next steps, including SOFR best practices and recommended fallback language. Additionally, ARRC provided FAQs covering additional background details on the committee and the transition from LIBOR.

    Federal Issues ARRC LIBOR SOFR Of Interest to Non-US Persons

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  • ARRC releases updated fallback language in the event of LIBOR transition

    Federal Issues

    On June 30, the Alternative Reference Rates Committee (ARRC) released updated recommended fallback language for U.S. dollar LIBOR denominated syndicated loans and new variable rate private student loans. ARRC noted that the private student loan language is intended to minimize risk and market disruption in the event of LIBOR’s anticipated cessation at the end of 2021. ARRC also released conventions for how market participants can voluntarily use the Secured Overnight Financing Rate (SOFR) in new student loan products. With respect to syndicated loans, ARRC noted that the updated fallback language recommends “the use of simple daily SOFR in arrears,” which, among other things, includes “a more permissive early opt-in trigger” to “allow parties involved in the loan to switch over to an alternative rate like SOFR before LIBOR is officially discontinued or determined to be unrepresentative.” Additionally, ARRC announced new details regarding its recommendation of spread adjustments for cash products that reference LIBOR. Market participants may voluntarily use ARRC’s recommended methodology to produce spread adjustments “where a spread-adjusted [SOFR] can be selected as a fallback.”

    Federal Issues ARRC LIBOR SOFR Student Lending Lending

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