New York Responds to Transition from LIBOR
On December 23, 2019, the New York State Department of Financial Services (the Department) issued a letter notifying regulated institutions that they are required to inform the Department of how they plan to address risk as the use of LIBOR ends after 2021.
The letter summarizes the impact that the cessation of LIBOR will have on institutions linked to it, as well as the likely impact on the market more broadly. The Department notes that any over-the-counter derivatives that will mature after 2021 potentially can be amended through a protocol that may be adopted by the International Swaps and Derivatives Association. Regarding LIBOR-based residential mortgage loans containing options for a lender to choose a comparable rate once LIBOR ends, the letter acknowledged that there are “legal, reputational and operational risks, that need to be carefully considered and managed.”
Given the risks associated with the termination of LIBOR, the Department requires that each regulated institution submits its transition plan to the Department by February 7, 2020. The plan must detail the following: (i) programs that would identify, measure, monitor and manage all financial and non-financial risks of transition; (ii) 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; (iii) processes for communications with customers and counterparties; (iv) a process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition; and (v) the governance framework, including oversight by the board of directors, or the equivalent governing authority, of the regulated institutions.
The letter also acknowledged that the Alternative Reference Rates Committee (ARRC), assembled by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, has endorsed the Secured Overnight Financing Rate, or SOFR, as its recommended alternative to LIBOR.
