On Dec. 23, 2019, the New York State Department of Financial Services (DFS) issued a letter to New York-regulated depository and non-depository institutions, insurers and pension funds directing them to submit their plans for managing the risks with regard to the cessation of the London Interbank Offered Rate (LIBOR) in 2021. Responses are required by Feb. 7, 2020.
According to the DFS, in the U.S., the gross notional value of all financial transactions of regulated institutions that are linked to the U.S. dollar LIBOR amounts to approximately $200 trillion. The DFS requires all regulated institutions with LIBOR exposure to fully understand the consequences of the LIBOR’s cessation, measure the transition risks, and evaluate the legal, financial and operational implications for them and all related parties. The DFS suggested that commercial loans linked to the LIBOR that mature, are renegotiated or are amended before 2021 may be converted to an alternative rate or incorporate fallback provisions that identify triggers for new rates prior to the discontinuation of the LIBOR. Similarly, the DFS suggested that OTC derivative transactions that extend beyond 2021 may be amended to incorporate new rates or fallback language provisions. The DFS noted that the Federal Reserve has chosen the Secured Overnight Financing Rate as its recommended alternative to the U.S. dollar LIBOR.
According to the DFS letter, each regulated institution should describe its plan to address LIBOR discontinuation and transition risk, including (1) programs that would identify, measure, monitor and manage all financial and nonfinancial risks of transition, (2) processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates for both the institution and its customers and counterparties, (3) processes for communications with customers and counterparties, (4) a process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition, and (5) the governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institutions.
Additional information on the DFS’s request regarding preparedness for LIBOR transition can be found here.