On July 12, 2019, the U.S. Securities and Exchange Commission (SEC) joined the call to prepare for the transition away from LIBOR. The staff of several Divisions of the SEC (the Divisions of Corporation Finance (DCF), Investment Management (DIM), and Trading and Markets (DTM)) and its Office of the Chief Accountant (OCA) issued a public statement regarding the impending transition away from using LIBOR as a benchmark and reference rate for commercial and financial contracts. Warning of the potential risks associated with the transition and the failure to prepare in advance, the SEC staff stated that it is monitoring the transition-related efforts of market participants and provided detailed recommendations regarding the courses of action market participants should consider taking. The U.S working group dedicated to recommending an alternative rate for USD LIBOR has offered the Secured Overnight Financing Rate or SOFR as its preferred alternative. The SEC staff statement noted that the SEC “does not endorse the use of any particular reference rate” and SEC staff is monitoring whether the use of multiple replacement rates for USD LIBOR instead of one could hinder the effectiveness of all alternative rates. The United Kingdom, the European Union, Japan and Switzerland also have working groups dedicated to recommending alternatives to LIBOR for their currencies. The SEC staff recommended that market participants stay abreast of developments in these and other jurisdictions, as well as potential changes to reference rates other than LIBOR, given that “work being performed globally to address reference rate transition risk is ongoing and evolving.”
The SEC staff set forth specific recommendations for companies to assess the impact of the LIBOR transition on their contracts, including existing contracts that extend beyond 2021 (the anticipated effective end of LIBOR) and new contracts that could use alternative reference rates or LIBOR in combination with fallback language.
- The staff suggested market participants expand their analysis to include the evaluation and mitigation of the impact of the LIBOR transition on their businesses overall, g. “strategy, products, processes, and information systems.”
- Each Division and the OCA then provided targeted information on “how the discontinuation of LIBOR may impact specific registrants and…how registrants might respond to this risk.”
- The DCF focused on company disclosure obligations related to the cessation of LIBOR and the determination of what disclosures are relevant and appropriate.
- The DIM addressed the effects on investment funds and advisers, focusing on those with investments in “instruments referencing LIBOR, such as floating rate debt, bank loans, LIBOR-linked derivatives, and certain asset-backed securities.”
- The DIM discussed the potential impact of the transition on the functioning, liquidity, and value of fund investments and disclosure obligations, encouraging funds to give investors a “tailored risk disclosure that specifically describes the impact of the transition on their holdings.”
- The DTM focused on broker-dealers, central counterparties, and exchanges, encouraging them to analyze fully how the transition will impact their businesses.
- Finally, the OCA addressed financial reporting issues that might arise in connection with the LIBOR transition.
The SEC staff invited discussion on these issues. You can read the full public statement here.
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Neil Bloomfield has more than a decade of experience advising major financial institutions, and other highly regulated entities in responding to government investigations, including responding to global investigations into LIBOR and other reference rates, foreign exchange trading, and the allegations raised by the Panama Papers. He also frequently advises clients as they implement programs to comply with regulatory requirements, including requirements created by Recovery and Resolution Planning and CCAR. View Mr. Bloomfield’s full bio.