US Agencies Urge Banks to Use Fallback Language in Legacy Contracts
US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to prepare for the use of alternative reference rates for their lending activities. The agencies reiterate that they are not endorsing a specific replacement rate for the London Inter-bank Offered Rate (LIBOR) for loans. For its loans, a bank may use any reference rate that it determines to be appropriate for its funding model and customer needs. However, the bank should include fallback language in its lending contracts to provide for the use of a robust fallback rate if the initial reference rate is discontinued.
The Alternative Reference Rates Committee recommended the Secured Overnight Financing Rate (SOFR) as its preferred alternative for both cash and derivative transactions. The use of SOFR, however, is voluntary. Examiners will not criticize banks solely for using a reference rate other than the SOFR for loans. The agencies encourage banks to
- determine appropriate reference rates for lending activities and begin transitioning loans away from LIBOR without delay.
- accelerate outreach to lending customers to ensure that they are aware of, and prepared for, the transition from LIBOR.
- consider any technical changes that might be required for internal systems to accommodate new reference rates or fallback rates.
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Keywords: Americas, US, Banking, LIBOR, Fallback Language, SOFR, Alternative Reference Rate Committee, Benchmark Reforms, US Agencies
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