Featured Product

    Randal Quarles of FED on Next Stage in Transition Away from LIBOR

    June 03, 2019

    Randal K. Quarles, Vice Chair for Supervision of FED, shared his remarks at the Alternative Reference Rates Committee (ARRC) Roundtable. He talked about the next critical stage in the transition away from LIBOR. He highlighted that regardless of how one chooses to transition, beginning that transition now would be consistent with prudent risk management and the duty owed to the shareholders and clients.

    Mr. Quarles mentioned that FED convened the ARRC based on the concerns about stability of LIBOR. The ARRC was charged with providing the market with tools that would be needed for a transition from LIBOR—an alternative rate that did not share the same structural instabilities that have led LIBOR to this point, a plan to develop liquidity in the derivatives market for this new rate so that cash users could hedge their interest rate risk, and models of better contract language that helped limit the risk from a LIBOR disruption. The ARRC has provided these tools and, with only two and a half years of further guaranteed stability for LIBOR, the transition should begin happening in earnest. He mentioned that the work of ARRC began by focusing on creating a derivatives market for the Secured Overnight Financing Rate (SOFR). As liquidity in these markets continues to develop, he hoped that many will close out their LIBOR positions.

    He also mentioned that, to ensure global financial stability, it is important that everyone participate in the ISDA consultations on better fallback language for LIBOR derivatives and then sign the ISDA protocol so that these fallbacks apply to the legacy book of derivatives. Similarly, ARRC's fallback recommendations represent a significant body of work on the part of a wide set of market participants and set out a robust and well-considered set of steps that expressly consider an end to LIBOR. There is, however, also another and easier path, which is simply to stop using LIBOR. As good as the fallback language may be, simply relying on fallback language to transition brings a number of operational risks and economic risks. Firms should be incorporating these factors into their projected cost of continuing to use LIBOR and investors and borrowers should consider them when they are offered LIBOR instruments.

    At a recent roundtable on the LIBOR transition held by FSB, private sector requested to provide greater clarity on regulatory and tax implications of the transition. Mr. Quarles highlighted that the official sector is taking these requests seriously. For example, FED is working with CFTC and other U.S. prudential regulators to provide greater clarity on the treatment of margin requirements for legacy derivatives instruments. Agency staff are developing proposed changes to the margin rules for non-cleared swaps to ensure that changes to legacy swaps to incorporate a move away from LIBOR, including adherence to the ISDA protocol, would not affect the grandfathered status of those legacy swaps under the margin rules. 

    The supervisory teams of FED have already included a number of detailed questions about plans for the transition away from LIBOR in their monitoring discussions with large firms. The supervisory approach will continue to be tailored to the size of institution and the complexity of LIBOR exposure, but the largest firms should be prepared to see supervisory expectations for them increase. Finally, he mentioned that some have recently claimed that the supervisory stress tests of FED would penalize a bank that replaces LIBOR with SOFR in loan contracts by lowering projections of net interest income under stress. In the recently published enhanced descriptions of the supervisory stress-test models, the supervisory projections of net interest income are primarily based on models that implicitly assume that other rates such as LIBOR or SOFR move passively with short-term Treasury rates. Given these mechanics, choosing to lend at SOFR, rather than LIBOR, will not result in lower projections of net interest income under stress in the stress-test calculations of FED. 

     

    Related Link: Speech

     

    Keywords: Americas, US, Banking, Securities, LIBOR, SOFR, ARRC, Interest Rate Risk, Fallback Language, Margin Requirements, Stress Testing, Risk-Free Rates, ISDA, FED

    Featured Experts
    Related Articles
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write Down and Conversion Powers

    The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.

    September 17, 2021 WebPage Regulatory News
    News

    ECB to Consider Climate Risks When Reviewing Collateral Framework

    In a response to the questions posed by a member of the European Parliament, the President Christine Lagarde highlighted the commitment of the European Central Bank (ECB) to an ambitious climate-related action plan along with a roadmap, which was published in July 2021.

    September 17, 2021 WebPage Regulatory News
    News

    SRB Provides Update on Approach to Prior Permissions Regime

    The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.

    September 16, 2021 WebPage Regulatory News
    News

    APRA Issues Further Guidance on Application of Securitization Standard

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.

    September 16, 2021 WebPage Regulatory News
    News

    ACPR Publishes Corrective Version of RUBA Taxonomy

    The French Prudential Control and Resolution Authority (ACPR) published the corrective version of the RUBA taxonomy Version 1.0.1, which will come into force from the decree of January 31, 2022.

    September 15, 2021 WebPage Regulatory News
    News

    Nordea Bank and EIB Sign Agreement to Fund Green Projects in Nordics

    The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.

    September 15, 2021 WebPage Regulatory News
    News

    APRA Publishes FAQs on Capital Treatment of Overseas Subsidiaries

    The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.

    September 15, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7487