Acting comptroller reiterates: Regulators will brook no new LIBOR exposures after year-end – ‘and we mean it’

Anyone in banking who thinks some form of LIBOR will remain available as a reference rate despite its scheduled expiration has another thing coming, the chief of the Office of the Comptroller of the Currency (OCC) indicated Tuesday.

“Let’s face it, there are still people out there who believe that some way, somehow Libor will not be discontinued but will survive as a ‘synthetic Libor,’ or as some have called it, a ‘zombie Libor,’” Acting Comptroller Michael Hsu said. “Let me clear, the federal financial regulators have said no new Libor exposures – zombie or otherwise – after December 31, 2021, and we mean it.”

Hsu was speaking before a symposium of the Alternative Reference Rates Committee (ARRC) Tuesday called “The SOFR Symposium: The Final Year.” Complacency about the LIBOR transition, and the reference rates that may replace LIBOR, were key themes.

To the complacent, Hsu said it’s not only banks’ use of LIBOR in their own contracts that is of concern; banks also need to focus on third-party activities. “If the bank is using a third-party vendor to provide financial valuation updates, asset/liability management modeling, or cash flow analysis of borrower collateral or bank assets, the vendor may be employing discounting methods using Libor-based rates. Even if none of these considerations currently present issues for the bank, management should still be screening new investments and activities for embedded Libor,” Hsu said.

Hsu also underscored his agency’s expectations that banks demonstrate that their LIBOR replacement rates “are robust and appropriate for their risk profile, nature of exposures, risk management capabilities, customer and funding needs, and operational capabilities.” He pointed to the International Organization of Securities Commissions’ (IOSCO) recognition of the Secured Overnight Financing rate, of SOFR, as a robust rate suitable for use in most products, “with underlying transaction volumes that are unmatched by other alternatives.”

For this reason, Hsu said, the OCC’s supervision in this area will initially focus on “non-SOFR” (Secured Overnight Financing Rate) rates.

“The OCC has stressed … the importance of successfully executing transition plans before new use of LIBOR stops and Libor ceases to be reported,” he said. “Banks have it within their power to avoid year-end market disruptions. Now is the time to pick up the pace. No excuses.”

In other comments, Hsu noted a “growing groundswell” of interest in “Term SOFR” – a rate derived from observable activity in the SOFR derivatives markets, and which can be set in advance and paid in arrears. Term SOFR, he said, is the intellectual property of the Chicago Mercantile Exchange (CME) – any use of Term SOFR requires a license from CME.