Following up on our past posts on the transition away from the use of the London Interbank Offering Rate (“LIBOR”) as a reference rate, recently, the Board of Governors of the Federal Reserve System (FRB) issued a letter setting forth guidance for FRB examiners to assist in their assessment of the progress of FRB-supervised firms in preparing for the LIBOR transition.

The guidance distinguishes between FRB-supervised firms with more than $100 billion in total consolidated assets (which they set forth more demanding expectations as the risk and exposure is more complicated) and those with less than $100 billion in total consolidated assets.

The letter most importantly notes that all FRB-supervised firms must move away from entering into new contracts that reference LIBOR after December 31, 2021. The guidance urges even smaller institutions to (1) identify any contracts that reference LIBOR; and (2) if entering into contracts that reference LIBOR before the end of 2021, to use robust fallback language that includes a defined alternative reference rate. The letter notes that entering into such new contracts that reference LIBOR after 2021 will create safety risks and encourages firms to move away from these contracts as soon as possible.

Examiners are encouraged to review FRB-supervised firms’ plans in accordance with the following key transition efforts, in addition to the above:

  • Transition planning;
  • Financial exposure measurement and risk assessment;
  • Operational preparedness and controls;
  • Legal contract preparedness (as noted above);
  • Communication; and
  • Oversight.

Federal Reserve banks are encouraged to distribute this letter guidance to each of the supervised firms within their districts. The letter will be critical resource for these FRB-supervised firms to consult in their transition planning away from LIBOR.

Norton Rose Fulbright also has assembled a group of its attorneys from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found here.