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

    BCBS Consults on Principles for Operational Risk and Resilience

    BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.

    August 06, 2020 WebPage Regulatory News
    News

    FSI Note Discusses Challenges Associated with COVID Relief Measures

    The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.

    August 06, 2020 WebPage Regulatory News
    News

    HKMA Announces Repayment Deferment Under Payment Holiday Scheme

    HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.

    August 05, 2020 WebPage Regulatory News
    News

    ESRB Paper Presents Alternative Approach to EBA Stress Test Proposal

    The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.

    August 05, 2020 WebPage Regulatory News
    News

    MAS Announces Key Initiatives to Support Adoption of SORA

    MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.

    August 05, 2020 WebPage Regulatory News
    News

    BoE Updates Template and Definitions for Form ER

    BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.

    August 05, 2020 WebPage Regulatory News
    News

    PRA to Extend Temporary High Balance Coverage Amid COVID Crisis

    PRA published the policy statement PS19/20 on the final policy for extending coverage under the Financial Services Compensation Scheme (FSCS) for Temporary High Balance.

    August 04, 2020 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure and Reporting of MREL and TLAC

    EBA published the final draft implementing technical standards for disclosures and reporting on the minimum requirements for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) requirements in EU.

    August 03, 2020 WebPage Regulatory News
    News

    EBA Releases Erratum for Phase 2 Package on Reporting Framework 2.10

    EBA published an erratum for the phase 2 of technical package on the reporting framework 2.10.

    August 03, 2020 WebPage Regulatory News
    News

    EC Sets Out Updated Technical Information for Solvency II Calculations

    EC published the Implementing Regulation 2020/1145, which lays down technical information for calculation of technical provisions and basic own funds.

    August 03, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5635