On December 23rd, 2019, Financial Services Superintendent Linda A. Lacewell announced that the New York State Department of Financial Services (NYDFS) is directing New York regulated depository and non-depository institutions, insurers and pension funds to submit their plans for managing the risks associated with the discontinuation of LIBOR at the end of 2021.1 The industry letter submitted to CEOs or the equivalent of all regulated institutions, has asked these institutions to describe programs and processes in place to manage risks associated with the transition to alternative reference rates.2 This includes programs that would asses the financial and non-financial risks, monitoring of alternative rates and their impact on clients and counterparties, communications with clients and counterparties, together with a plan for operational readiness and their overall governance framework. Responses must be submitted to NYDFS by February 7th, 2020.3  

What this means 

LIBOR is widely used to price a large number of loans, derivatives and securities transactions, and as NYDFS regulated institutions are engaged in these products, its cessation should have a significant impact on them as well as on the broader market. The NYDFS letter states that financial institutions that have LIBOR exposure on the asset or liability side of their balance sheets need to be prepared for this event, and that they fully understand the transition risks, and the implications for them and their clients and counterparties.4 The NYDFS has stated in the letter that they understand the large number of commercial and retail loans that have to be renegotiated or amended before 2021, and that these have to be converted to an alternative rate, and incorporate fallback language provisions into legal contracts where necessary.5 They note that changing the interest rate basis of any loan presents risks, including legal, operational and reputational risks, and that these need to be considered and managed.6 Additionally, there are a number of Over-the-Counter (OTC) derivatives transactions that extend beyond 2021, and while the International Swaps and Derivatives Association (ISDA) may institute a protocol for fallback language in existing contracts, financial firms should be cognizant of valuation, portfolio matching concerns, and monitoring issues.7 To that end, the NYDFS is requiring each regulated institution submit a response describing its plan to address its LIBOR cessation and transition risk by February 7th, 2020.8 

Conclusion 

With this letter, the NYDFS is taking action, much like the Financial Conduct Authority (FCA) in the UK, to make sure regulated financial institutions’ boards of directors and senior management understand and have assessed the risks associated with the LIBOR transition, and have developed a robust plan to manage them, together with initiating policies and procedures to facilitate the transition to alternative benchmark rates. Superintendent Lacewell said, “Our financial institutions with LIBOR exposure need to prepare to manage the significant risks associated with its likely cessation and be ready to transition to alternative reference rates.”9 

Visit our LIBOR offering page to learn how our solutions can help you transition from LIBOR with confidence. 

References:  

  1. “Financial Services Superintendent Linda A. Lacewell Announces Action to Ensure Regulated Financial Institutions are Prepared for LIBOR Transition,” New York State Department of Financial Services, Press release, December 23, 2019. Access at: https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1912231. 
  2. “Industry Letter: Request for Assurance of Preparedness for LIBOR Transition,” New York State Department of Financial Services, December 23, 2019. Access at: https://www.dfs.ny.gov/system/files/documents/2019/12/il191223_libor_letter.pdf.
  3. NYDFS Orders Financial Institutions to Submit LIBOR Transition Preparedness Plans,” Cadwalader Cabinet, December 23, 2019. Access at: https://www.findknowdo.com/news/12/23/2019/nydfs-orders-financial-institutions-submit-libor-transition-preparedness-plans 
  4. “Industry Letter: Request for Assurance of Preparedness for LIBOR Transition,” New York State Department of Financial Services, December 23, 2019. Access at: https://www.dfs.ny.gov/system/files/documents/2019/12/il191223_libor_letter.pdf
  5. Ibid 
  6. Ibid 
  7. Ibid 
  8. “Financial Services Superintendent Linda A. Lacewell Announces Action to Ensure Regulated Financial Institutions are Prepared for LIBOR Transition,” New York State Department of Financial Services, Press release, December 23, 2019. Access at: https://www.dfs.ny.gov/reports_and_publications/press_releases/pr1912231. 
  9. Ibid 

Newsletter Author: Venetia WooMairi Bryan
Newsletter Contact Person: Venetia Woo 

Disclaimer  

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