US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition. The statement explains that the June 30, 2023 cessation date—for which ICE Benchmark Administration (IBA), the LIBOR's administrator, plans to consult—would allow time for "legacy contracts" (USD LIBOR transactions executed before January 01, 2022) to mature. FED also welcomed and supported the release of a proposal and supervisory statements that would enable a clear end date for USD LIBOR.
ICE Benchmark Administration Limited has announced that it will consult in early December on its intention to cease the publication of the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021 and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. The UK FCA, which is the regulator of LIBOR, also welcomed these developments. FCA indicated that it will, in coordination with the US authorities and relevant authorities in other jurisdictions, consider whether and, if so, how to most appropriately limit new use of USD LIBOR by supervised entities in the UK, consistent with the FCA's objectives of protecting consumers and market integrity. The announcements by regulators in the US and the UK and by the benchmark administrator for LIBOR together lay out a path forward in which banks should stop writing new USD LIBOR contracts by the end of 2021, while most legacy contracts will be able to mature before LIBOR stops.
In the joint statement, US Agencies emphasized that failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks' safety and soundness. New contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after discontinuation of LIBOR. These actions are necessary to facilitate an orderly—and safe and sound—LIBOR transition. If the administrator of LIBOR extends the publication of USD LIBOR beyond December 31, 2021, the agencies also recognized that there may be limited circumstances when it would be appropriate for a bank to enter into new USD LIBOR contracts after December 31, 2021, such as the following:
- Transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure
- Market making in support of client activity related to USD LIBOR transactions executed before January 01, 2022
- Transactions that reduce or hedge the bank’s or any client of the bank’s USD LIBOR exposure on contracts entered into before January 01, 2022
- Novations of USD LIBOR transactions executed before January 01, 2022
Keywords: Americas, US, Banking, LIBOR, USD LIBOR, Benchmark Reforms, LIBOR Transition, US Agencies
Previous ArticleSRB Sets Out Work Program for 2021-2023
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.