On 10 February 2021 the Office of the Comptroller of the Currency (OCC) issued OCC Bulletin 2021-7, which provides a self-assessment tool to help national banks, federal savings associations and federal branches and agencies of foreign banking organisations evaluate their preparedness for the expected cessation of the London Interbank Offered Rate (LIBOR).
LIBOR is a reference rate commonly used in transactions that involve loans and derivatives engaged in by financial institutions and other sophisticated market participants. It is being phased out and replaced by risk-free rates (eg, the Secured Overnight Financing Rate) globally. By 31 December 2021 banks are expected to cease entering into contracts that use LIBOR as a reference rate.(1)
Transitioning away from LIBOR has been an operational and legal hurdle for the industry. Various levels of effort are required, depending on the size and scope of the activities engaged in by market participants. The OCC bulletin notes as follows:
There is risk of market disruptions, litigation, and destabilized balance sheets if acceptable replacement rate(s) do not attract sufficient market-wide acceptance or if contracts cannot seamlessly transition to new rate(s).
The OCC self-assessment tool aims to help bank management personnel evaluate an institution's progress with regard to the LIBOR transition. It is a checklist that focuses on four areas:
- exposure assessment and planning;
- replacement rates;
- fallback language; and
- progress and oversight.
Not all sections and questions will apply to all banks. According to the OCC, the responses will depend on the size and scope of an institution's activities. Perhaps unsurprisingly, the OCC also acknowledges that large or complex banks and those with material LIBOR exposures are expected to have a "robust, well-developed transition process in place", whereas smaller or non-complex banks and those with limited LIBOR exposures may engage in "less extensive and less formal transition efforts".
The OCC advises that in 2021, LIBOR-related assessments and plans should be "at least near completion with appropriate management oversight and reporting in place" and that "most banks should be working toward resolving replacement rate issues while communicating with affected customers and third parties".
The self-assessment tool is aimed at bank management personnel in:
- national banks;
- federal savings associations; and
- the federal branches and agencies of foreign banking organisations.
The bulletin does not indicate that institutions must report their responses to the self-assessment tool to the OCC or that a self-assessment must be conducted at all. However, institutions should view the tool as an analytical framework to assess their LIBOR transition preparedness. Institutions' responses will help them to respond to any more formal requests for information, including from examiners.
Endnotes
(1) For more information please see "LIBOR transition resource centre".
