December 4, 2021

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Federal Reserve Offers FAQs for LIBOR Transition Clarity

The Federal Reserve offered clarifications to supervised firms on the transition from LIBOR.

In updates to its FAQs, the Fed explained, among other things, that:

  • modifications to LIBOR-referenced adjustable-rate mortgages will not be considered by supervisors as a new contract unless the changes, (i) increase a supervised institution's LIBOR exposure or (ii) lengthen the term of the mortgage;

  • the automatic renewal of a loan contract will be viewed by supervisors as a new contract;

  • physical settlements of a contract that existed before the end of 2021 will not be viewed as a new contract;

  • there are few circumstances in which it would be appropriate for a supervised institution to enter into a new LIBOR contract after 2021;

  • it is appropriate for supervised institutions to engage in secondary trading of LIBOR-linked instruments that are issued before the end of 2021;

  • contracts entered into before the end of 2021 should either (i) use a non-LIBOR reference rate or (ii) include strong and clear fallback language to ensure that all parties to a LIBOR contract are in agreement as to how the interest rate will be calculated once LIBOR is not available; and

  • for supervised institutions with LIBOR exposure, examiners will focus on (i) transition planning, (ii) financial exposure management and risk assessment, (iii) operational preparedness and controls, (iv) legal contract preparedness, (v) communication and (vi) oversight.

© Copyright 2021 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 329
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