Harrisburg, PA - Secretary of Banking and Securities Robin L. Wiessmann has issued a letter urging state-regulated banks, credit unions, and financial services companies to take action and prepare for the replacement of London Interbank Offered Rate (LIBOR).
LIBOR is the estimated average of interbank lending rate in London. The Financial Conduct Authority, which oversees the benchmark, announced it will be phased out by the end of 2021.
“Financial firms that use LIBOR as a reference or index rate for loan or other contracts need to begin taking risk management actions now,” said Wiessmann.
She continued, “If firms delay the transition to an alternative index, the risks associated with the discontinuance of the interest rate index will only be exacerbated.”
The Department suggests the following risk management actions:
- Identify immediately all on- and off- balance sheet contracts using LIBOR as an index.
- Consider using an alternative interest rate index for all new contracts.
- Determine which existing contracts will continue to exist beyond 2021 and ensure that their documentation includes appropriate fallback language in the event LIBOR becomes publicly unavailable.
- Work with customers and counterparties to amend the necessary documentation.
- Develop disclosures for affected customers.
- Consult with vendors.
In June 2017, the Alternative Reference Rates Committee (ARRC) identified as an alternative to LIBOR the Secured Overnight Financing Rate (SOFR), which is published by the Federal Reserve Bank of New York in cooperation with the U.S. Office of Financial Research. While most transactions may be best suited for SOFR, financial institutions may select any reference rate for use as an alternative to LIBOR.
The letter was directed to all Pennsylvania state-chartered institutions, and licensed and registered financial services companies.
MEDIA CONTACT: Dulcey Antonucci - 717.214.6036, DoBSComm@PA.gov
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