Many financial institutions make consumer loans, residential mortgage loans, and commercial loans with pricing based on the London Inter-Bank Offered Rate (LIBOR). In 2017 the United Kingdom’s Financial Conduct Authority (the regulator that oversees the LIBOR panel) announced that, by the end of 2021, it will discontinue the index. The Federal Reserve Board of Governors and the Federal Reserve Bank of New York (FRBNY) in conjunction with the U.S. Treasury Department’s Office of Financial Research have created a new index named the Secured Overnight Financing Rate (SOFR) as a suggested replacement for LIBOR.
All financial institutions that use LIBOR need a plan to transition to SOFR or another index. On December 23, 2019 the New York Department of Financial Services (NYDFS) notified the institutions that it regulates to submit assurance of preparedness for LIBOR transition by February 7, 2020. The submission should include a description of its plan to address its LIBOR transition risk including safety and soundness, legal, reputation, and operational risks.
The NYDFS believes the process requires significant effort, which should have already commenced. The NYDFS requires the plan to address:
- Programs that would identify, measure, monitor and manage all financial and non-financial risks of transition
- Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties
- Processes for communications with customers and counterparties
- A process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition
- The governance framework, including oversight by the board of director, or the equivalent governing authority, of the regulated institution
Similar action is expected from Federal regulators and regulators in other states as the discontinuation date approaches.