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

    APRA Consults on Standard for Reporting of COVID-19 Loans

    APRA issued a letter to authorized deposit-taking institutions announcing its intent to formalize the capital measures and reporting requirements for COVID-19 loans through temporary legislative instruments.

    August 13, 2020 WebPage Regulatory News
    News

    EBA Consults Industry on Use and Uptake of Regtech Solutions Across EU

    EBA is inviting relevant stakeholders, such as financial institutions and information and communication technology (ICT) third-party providers, to share their views and experience on the use of regtech solutions through its regtech industry survey.

    August 12, 2020 WebPage Regulatory News
    News

    FCA Finalizes Guidance to Extend Measures for Insurers Amid COVID

    FCA finalized the guidance extending measures to help customers that hold insurance and premium finance products and are in temporary financial difficulty because of COVID-19 crisis.

    August 12, 2020 WebPage Regulatory News
    News

    BoE Clarifies Approach to Treatment of Payment Holidays on Form PL

    BoE published a statistical notice (Notice 2020/9) explaining the approach for treatment of payment holidays on the profit and loss return or Form PL.

    August 11, 2020 WebPage Regulatory News
    News

    FASB to Conduct Post-Implementation Review of CECL Standard

    FASB announced the launch of its new Post-Implementation Review (PIR) web portal.

    August 11, 2020 WebPage Regulatory News
    News

    EBA Guidance on Impact of CRR Quick-Fix on Reporting and Disclosures

    EBA revised the draft implementing technical standards on supervisory reporting as part of the reporting framework 3.0.

    August 11, 2020 WebPage Regulatory News
    News

    ECB Examines ICAAP Practices of Banks in EU

    ECB published report that presents a summary of the analysis conducted on the internal capital adequacy assessment process (ICAAP) practices of a sample of 37 "significant" banks.

    August 11, 2020 WebPage Regulatory News
    News

    EC Proposes to Amend Rules for Financial Benchmarks

    EC published a proposal for a regulation that amends the Benchmarks Regulation (2016/1011) regarding the exemption of certain third-country foreign-exchange benchmarks and the designation of replacement benchmarks for certain benchmarks in cessation.

    August 11, 2020 WebPage Regulatory News
    News

    PRA Suspends Relevant Guidance Levels on Fixed Rate Lending Limits

    PRA published a letter from Mel Beaman, the Director for UK Deposit Takers, to suspend the relevant guidance levels on fixed rate lending limits in the “Specialist Sourcebook” for an initial period of six months, running from August 01, 2020 to January 31, 2021.

    August 11, 2020 WebPage Regulatory News
    News

    BoE Provides Reporting Update on Form AS and Form FV

    BoE updated the known issues document for the statistical reporting Forms AS and FV.

    August 10, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5671