“The transition away from LIBOR is a significant event given how embedded the benchmark rate is across the financial system, and while it should take time, it is expected to pose less risk if the transition is carefully planned and executed.”

On September 19, 2019, the Alternative Reference Rate Committee (ARRC) issued a “Practical Implementation Checklist” for the adoption of the new Secured Overnight Financing Rate (SOFR).1 The ARRC was convened by the Board of Governors of the Federal Reserve Board (FRB) and the Federal Reserve Bank of New York, together with other regulatory agencies, banks, market participants and industry associations, to identify an alternative benchmark rate to replace the London Interbank Offered Rate (LIBOR), and to develop a market strategy for the transition.2 In June 2017 the ARRC selected the Secured Overnight Financing Rate (SOFR) as the replacement for USD LIBOR, and published a Paced Transition Plan with specific timelines for transition in order to coordinate industry efforts.3 The ARRC’s “Practical Implementation Checklist” has been developed as an informational document for market participants, and contains ten suggested considerations for an efficient transition to SOFR, across businesses and functions.4  

What this means

The transition away from LIBOR is a significant event given how embedded the benchmark rate is across the financial system, and while it should take time, it is expected to pose less risk if the transition is carefully planned and executed. The ARRC has identified ten areas of considerations for SOFR adoption, which include Program Governance, Risk Management, Contractual Remediation and Communication Strategy, among others.5  

  • Program Governance 

Implement a robust governance framework with accountable senior executives, identify accountable business sponsors and project management leads and define and prioritize program objectives and internal milestones in line with the ARRC’s Paced Transition Plan. 

  • Transition Program Mobilization 

Establish an enterprise-wide program across functions and businesses to evaluate and mitigate the risks associated with the transition, specifically for unique product and client exposures, and confirm budget and resources necessary to conduct and monitor the progress of the implementation plan and identify and escalate risks. 

  • Communication Strategy 

Develop a strategy to proactively communicate with both internal and external stakeholders and impacted groups such as clients, regulators, and the ARRC, and provide clear and consistent messaging, in order to limit legal, conduct and reputational risks. 

  • Exposure Management 

Quantify and develop an approach to monitor LIBOR-linked products through transition process, and construct capabilities to value and price SOFR-linked products. 

  • Portfolio and Product Strategy 

Develop a strategy for redesigning or transitioning an existing portfolio of LIBOR-based products, and for the creation of new SOFR-based products, including defining risk and product approval requirements, together with the timelines for offerings and resulting hedging requirements. 

  • Risk Management 

Define the key transition risks and establish processes to measure and monitor the identified material risks, together with mitigating actions to address these risks with specific focus on product, basis, operational and conduct risks. 

  • Contractual Remediation 

Review existing LIBOR related contracts, inventorying changes to terms, financial impact, customer impact and legal interpretations. Project the impact of fallbacks, and incorporate recommended fallback language developed by the ARRC, the International Swaps and Derivative Association (ISDA), and other industry working groups and peers. 

  • Operational and Technology Readiness 

Develop and implement a plan to assess where LIBOR is used across all core business functions and prioritize business lines with higher exposure. Develop a process to incorporate new market data sources and calculation methodologies into technology and trading systems and define requirements and implement capabilities to build SOFR products to replace LIBOR products. 

  • Accounting and Reporting 

Identify impacts to hedge accounting, accounting standards for cash products, impairment to profit and loss (P&L), current state finance systems and operations, and assess the control environment for these impacted processes. All financial disclosures for impacted processes should be updated accordingly. 

  • Tax and Regulation 

Determine the tax and regulatory implications on hedge accounting, regulatory capital, and public filings, together with any required reporting considerations. 

Conclusion  

The ARRC has published this checklist in conjunction with a number of financial services firms who are part of the ARRC’s Outreach and Communication Working Group, and they have primarily focused on banks and capital markets institutions. While they suggest that it may be helpful for other financial market firms such as investment managers, insurers and corporate treasurers, these groups would have other requirements associated with the LIBOR transition, and adoption of SOFR.6 This checklist for example focuses on firms with USD LIBOR exposure, but does not address non-USD exposure, and firms with foreign currency LIBOR exposure, such as multi-national corporations, should establish coordinated plans across relevant jurisdictions.71 They also explain that the checklist is a guide, and does not constitute legal, accounting or financial advice and is not an implementation plan, and stress that each firm would need to define its own transition plan, and customize to their particular business.8  

The transition away from the LIBOR benchmark rate is expected to be very demanding and complicated. In response, Accenture commissioned a survey to gauge financial services firms’ level of readiness, their ability to transition away from LIBOR, the challenges faced and the impacts. Download the survey findings now. 

References 

  1. “ARRC Release Practical Implementation Checklist for SOFR Adoption,” Alternative Reference Rates Committee, September 19, 2019. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-SOFR-Checklist-Press-Release-20190919.pdf  
  2. “Opening Statement of Chairman J. Christopher Giancarlo before the Market Risk Advisory Committee Meeting, Washington D.C.,” U.S. Commodity Futures Trading Commission, July 12, 2018. Access at: https://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement071218 
  3. The ARRC’s Paced Transition Plan, New York Fed, October 30, 2018. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Progress-Timeline-Oct-30.pdf  
  4. “ARRC Release Practical Implementation Checklist for SOFR Adoption,” Alternative Reference Rates Committee, September 19, 2019. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/ARRC-SOFR-Checklist-Press-Release-20190919.pdf    
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Newsletter Author: Venetia WooMairi Bryan 

Newsletter Contact Person: Venetia Woo 

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation. 

Disclaimer  

This blog is intended for general informational purposes only, does not take into account the reader’s specific circumstances, may not reflect the most current developments, and is not intended to provide advice on specific circumstances. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this blog and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional. 

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