OCC Releases Self-Assessment Tool to Help Institutions Prepare for LIBOR Shutdown – Commentary
OCC Self-Assessment Tool
On February 10, 2021, the Office of the Comptroller of the Currency (OCC) issued OCC Bulletin 2021-7, which provides a self-assessment tool to help national banks, federal savings associations, and federal branches and agencies of foreign banking organizations assess their readiness for the planned termination of the London Interbank Offered Rate (LIBOR) .
LIBOR is a benchmark rate commonly used in transactions involving loans and derivatives entered into by financial institutions and other sophisticated market participants. It is being phased out and replaced by risk-free rates (for example, the guaranteed overnight rate) globally. By December 31, 2021, banks are expected to stop entering into contracts using LIBOR as the benchmark rate.(1)
The abandonment of LIBOR has been an operational and legal hurdle for the industry. Different levels of effort are required, depending on the size and scope of activities carried out by market participants. The OCC bulletin notes the following:
There is a risk of market disruption, litigation and destabilized balance sheets if acceptable replacement rates do not attract sufficient market acceptance or if contracts cannot move seamlessly to new rates.
The purpose of the OCC Self-Assessment Tool is to help the bank’s management staff assess an institution’s progress with regard to the LIBOR transition. This is a checklist that focuses on four areas:
- exposure assessment and planning;
- replacement rate;
- backup language; and
- progress and monitoring.
Not all sections and questions will apply to all banks. According to the OCC, the answers will depend on the size and scope of an institution’s activities. It is perhaps not surprising that the OCC also recognizes that large or complex banks and those with large LIBOR exposures should have put in place a “strong and well-developed transition process”, while Smaller or non-complex banks and those with limited LIBOR exposures may engage in “less extensive and less formal transition efforts”.
The OCC says that by 2021, LIBOR-related assessments and plans should be “at least nearing completion with appropriate monitoring and management reporting in place” and that “most banks should work to resolve issues. replacement rate issues while communicating with affected customers and third parties. “.
The self-assessment tool is intended for bank executives in:
- national banks;
- federal savings associations; and
- branches and federal agencies of foreign banking organizations.
The bulletin does not indicate that institutions must report their responses to the self-assessment tool to the OCC or that a self-assessment should be performed. However, institutions should view the tool as an analytical framework to assess their readiness for the LIBOR transition. Responses from institutions will help them respond to any more formal requests for information, including from examiners.
For more information on this topic, please contact Marc Chorazak Where Le-el Sinai to Shearman & Sterling LLP by phone (+1 212 848 4000) or email ([email protected] Where [email protected]). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
(1) For more information, please see “LIBOR Transition Resource Center“.