LIBOR Readiness: the OCC Releases a Self-Assessment Tool

LIBOR READINESS: THE OCC RELEASES A SELF-ASSESSMENT TOOL

On February 10, 2021, the Office of the Comptroller of the Currency (the “OCC”) issued a bulletin (OCC Bulletin 2021-7) that provides a self-assessment tool for national banks, federal savings associations, and federal branches and agencies of foreign banking organizations (“banks”) to evaluate their preparedness for the expected cessation of the London Interbank Offered Rate (“LIBOR”).

What’s the Background?

LIBOR is a reference rate used most commonly in transactions involving loans and derivatives engaged in by financial institutions and other sophisticated market participants. It is being phased out globally and replaced by risk-free rates, including the Secured Overnight Financing Rate. It is expected that banks will cease entering into new contracts that use LIBOR as a reference rate by December 31, 2021. For additional background on the LIBOR transition, please visit our LIBOR Transition Resource Center.

The global effort to transition away from LIBOR has been an operational and legal hurdle for the industry, requiring varying levels of attention depending on the size and scope of activity engaged in by market participants. As the OCC notes in its bulletin, “[t]here is risk of market disruptions, litigation, and destabilized balance sheets if acceptable replacement rate(s) do not attract sufficient market-wide acceptance or if contracts cannot seamlessly transition to new rate(s).”

What Is the OCC’s Self-Assessment Tool?

The OCC’s self-assessment tool is designed to assist bank management personnel in evaluating an institution’s progress with the LIBOR transition. The assessment tool, which is annexed to this memorandum, is in the form of a checklist focusing on four areas:

Exposure Assessment and Planning,

Replacement Rates,

Fallback Language, and

Progress and Oversight.

Not all sections or questions will apply to all banks. According to the OCC, responses will depend on the size and scope of their activities. Perhaps not surprisingly, the OCC also acknowledges that large or complex banks and those with material LIBOR exposures are expected to have a “robust, well-developed transition process in place,” whereas smaller or non-complex banks and those with limited LIBOR exposures may be engaging in “less extensive and less formal transition efforts.”

The OCC advises that, in 2021, LIBOR-related assessments and plans should be “at least near completion with appropriate management oversight and reporting in place,” and that “[m]ost banks should be working toward resolving replacement rate issues while communicating with affected customers and third parties.”

What Are the Next Steps?

There is no indication in the bulletin that responses to the self-assessment tool are required to be reported to the OCC or that a self-assessment is required to be conducted at all. However, as a practical matter, institutions should view the tool as offering an analytical framework for assessing their LIBOR transition preparedness. Responses to the questions contained in the tool will be helpful in eventually responding to any more formal requests for information, including from examiners.

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Please reach out to us with any questions on the OCC’s self-assessment tool or on the LIBOR transition generally.

Libor Self-Assessment Tool
Attachment to OCC Bulletin 2021-7,
“Libor Transition: Self-Assessment Tool for Banks”

Overall comments:

Exposure Assessment and Planning

Objective: Is the bank managing Libor cessation from an appropriately detailed transition plan commensurate with the size and complexity of Libor exposures? Keep in mind that even a few contracts (e.g., loans) could pose material reputation risk to a bank and materially affect earnings through legal expenses. Consider in your assessment:

☐ Yes

☐ No

Comments:

Did management identify and quantify Libor exposure in all product categories and lines of business, both on- and off-balance-sheet, and asset management activities outside of loans and deposits?

☐ Yes

☐ No

Did management assess all third-party-provided products, services, and systems for Libor exposure?

☐ Yes

☐ No

Has management held discussions with third parties about exposures and the third parties’ transition plans and progress?

☐ Yes

☐ No

Has management performed a Libor risk assessment that covers applicable risk areas, such as compliance (including legal and consumer harm), operational, reputation, and strategic?

☐ Yes

☐ No

Did management assess the potential impact(s) to the bank’s customers?

☐ Yes

☐ No

Does the bank’s preparedness plan include appropriate strategies to inventory, analyze, and assess the risk associated with new and existing contracts? Do strategies include assessing the adequacy of fallback language in new and existing contracts?

☐ Yes

☐ No

Does the bank’s preparedness plan consider limiting exposure by discontinuing the origination or purchase of Libor-indexed instruments?

☐ Yes

☐ No

Did management develop appropriate plans to identify, monitor, and resolve system and infrastructure constraints (e.g., the ability of a system to handle compounding in arrears if the bank is electing to use the Secured Overnight Financing Rate)?

☐ Yes

☐ No

Did management develop strategies to address third-party risk management issues?

☐ Yes

☐ No

Did management assess the potential financial impacts, both balance sheet and earnings, from Libor transition and develop plans to manage and mitigate the risks accordingly?

☐ Yes

☐ No

Is the formality of the plan commensurate with the size and complexity of the bank’s Libor exposures?

☐ Yes

☐ No

Did all relevant parties have input into the plan (e.g., legal, treasury, accounting, compliance, operations/information technology)?

☐ Yes

☐ No

Does the plan establish reasonable time frames for completing key activities and assigning accountability for deliverables?

☐ Yes

☐ No

Objective: Does the bank have appropriate processes in place to implement Libor transition plans?

☐ Yes

☐ No

Has the management tasked an individual or committee/working group with the responsibility for coordinating and implementing the preparedness plan?

☐ Yes

☐ No

Does management have appropriate communication plans for engaging with affected customers and counterparties?

☐ Yes

☐ No

Does management provide accurate, timely, and complete reports to senior management and the board to monitor progress in implementing the transition plan (e.g., reports that monitor progress and challenges in renegotiating existing contracts)?

☐ Yes

☐ No

Does the board receive Libor transition reports with an appropriate frequency?

☐ Yes

☐ No

Replacement Rates

Objective: Did management plan for and identify appropriate replacement rates and spread adjustment methodologies? Keep in mind that the OCC does not endorse a specific Libor replacement rate. Consider in your assessment:

☐ Yes

☐ No

Comments:

Has management developed appropriate strategies to identify replacement rates and spread adjustments and modify new and existing contracts, as necessary? Consider in your assessment:

☐ Yes

☐ No

Have strategies addressed replacement rate availability, suitability, and appropriateness?

☐ Yes

☐ No

Have strategies addressed uncertainty of alternative rates market liquidity and availability and management’s strategies to mitigate the risks associated with illiquid or unavailable alternative rates markets?

☐ Yes

☐ No

Has management identified appropriate replacement rates and adjustment methodologies that do not result in customer harm or expose the bank to unwarranted compliance and reputation risks?

☐ Yes

☐ No

If management has identified replacement rates, can the bank’s systems accommodate the rates?

☐ Yes

☐ No

Fallback Language

Objective: Did management plan for and take sufficient actions to ensure the appropriateness of fallback language in both existing contracts and new contracts?

☐ Yes

☐ No

Comments:

Did the management’s analysis of fallback language include an assessment of whether the fallback language has clear and executable terms?

☐ Yes

☐ No

Did management assess the appropriateness of contract elements for existing and new contracts?

☐ Yes

☐ No

For derivatives exposures, did management take appropriate steps to determine whether adherence to the International Swaps and Derivatives Association’s new contract provisions is feasible?

☐ Yes

☐ No

Has management identified fallback language for legacy contracts?

☐ Yes

☐ No

Did management determine the laws and regulations applicable to contract negotiations and implement controls for compliance during negotiations?

☐ Yes

☐ No

Did management begin negotiations to modify fallback language in legacy contracts? If not, are there plans to do so?

☐ Yes

☐ No

Is management using robust fallback language when executing new contracts?

☐ Yes

☐ No

Progress and Oversight

Objective: Is progress toward Libor cessation preparedness sufficient given the size and complexity of risk exposures? Consider in your assessment:

☐ Yes

☐ No

Comments: