Federal Agencies Release Joint Statement on Managing the LIBOR Transition | Goodwin

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REGULATORY CHANGES

FEDERAL AGENCIES RELEASE JOINT STATEMENT ON LIBOR TRANSITION MANAGEMENT

On October 20, the federal financial institutions regulators, in conjunction with state bank and credit union regulators, issued a statement to emphasize the importance of an orderly transition away from LIBOR. In addition, the statement includes clarifications regarding new LIBOR contracts, considerations when assessing the suitability of alternative benchmark rates, and fallback language expectations. The statement warns that failure to adequately prepare for the LIBOR shutdown could jeopardize financial stability as well as the safety and soundness of institutions and create litigation, operational and consumer protection risks.

LIBOR TRANSITION: UPDATED SELF-ASSESSMENT TOOL FOR BANKS

On October 18, the OCC released an updated self-assessment tool for banks to assess their readiness for LIBOR termination. While banks may use any proxy rate they deem appropriate for their funding model and customer needs, OCC’s oversight efforts will initially focus on non-SOFR rates. Bank management should adapt the bank’s risk management process to the size and complexity of the bank’s LIBOR exposures

Bank management should use the updated self-assessment tool to assess whether:

  • The rate always reflects the competitive forces of supply and demand and is anchored by a sufficient number of arm’s length observable transactions in all market conditions, including periods of stress;
  • The historical data underlying the rate is detailed and covers a variety of economic conditions;
  • The rate administrator maintains a sustainable methodology and governance processes to ensure the quality and integrity of the benchmark during times of market stress;
  • Rate transparency provides market participants with the ability to understand the methodology, allowing them to independently justify published rates; and
  • The market for financial instruments using the rate is sufficiently liquid to allow effective management of market risk.

New or amended financial contracts should have fallback wording that allows for effective replacement of rates clearly identified in the contract terms. Bank management should consider and prepare for all applicable risks such as operational, compliance, strategic, and reputational risks when defining and conducting LIBOR termination readiness assessments.

CFTC INTEREST RATE BENCHMARK REFORM SUBCOMMITTEE SELECTS NOVEMBER 8 FOR SOFR FIRST FOR NON-LINEAR DERIVATIVES

As part of the MRAC’s first SOFR initiative, intermediary brokers will be encouraged to change USD non-linear derivatives trading agreements to SOFR from 8 November. negotiable form and ISDA publishes updated settlement provisions for the ICE SOFR to USD swap rate. Although brokers can still execute USD LIBOR non-linear derivatives with clients after November 8, 2021, guidelines from US banking regulators state that brokers must stop entering into new contracts that use USD LIBOR as a reference rate as soon as possible and in any case. by December 31, 2021. For the purposes of SOFR First, non-linear USD derivatives include swaptions, caps and floors. Other products such as Exotic Options, Bermudian Options and Constant Maturity Swaps are not included and may continue to be traded on the interdealer market after November 8, 2021. The fourth and final phase of SOFR First will involve derivatives traded on the stock exchange with a timetable to be determined.

FINCEN RELEASES REPORT ON RANSOMWARE TRENDS IN BANK SECRECY ACT DATA

On October 15, FinCEN released a Financial Trends Analysis (FTA) identifying ransomware as a particularly acute cybercrime problem and a growing threat to the US financial sector, businesses and the public, with recent attacks targeting various industries, including manufacturing, legal, insurance, healthcare. , energy, education, and the food supply chain in the United States and around the world. The FTA reported rapid growth in ransomware-related SARs filed monthly between January and June 2021, up 30% from the total SARs filed in the entire calendar year of 2020, and identified bitcoin as the mode ransomware-related payment method in reported transactions. FinCEN’s FTA concludes with recommendations for detecting and mitigating ransomware attacks.

DOL PROPOSES A RULE TO REMOVE ESG-RELATED BARRIERS IN PLAN MANAGEMENT

On October 13, the U.S. Department of Labor announced a proposed rule that would remove barriers to plan trustees’ ability to consider climate change and other environmental, social, and governance (ESG) factors when selecting investments and exercise shareholder rights. ERISA trustees are expected to act in the best interests of plan participants and beneficiaries. Under the Trump administration, ERISA trustees were permitted to select investments based solely on pecuniary factors and were prohibited from adding or retaining any investment fund, product, or portfolio if that fund, product, or portfolio reflected non-monetary investment objectives or strategies. . The DOL’s proposed rule seeks to address Trump-era additions by allowing ERISA trustees to assess the economic effects of ESG factors on any particular investment. The comment period runs for 60 days after publication in the Federal Register.

“A main idea underlying the proposal is that climate change and other ESG factors can be financially material and, when they are, their consideration will inevitably lead to better risk-adjusted returns over the long term, thereby protecting the retirement savings of American workers.”
– Acting Assistant Secretary for Benefits Security Administration Ali Khawar

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