Weekly RoundUp October 21, 2021

Federal Agencies Issue Joint Statement on Management of LIBOR Transition

Editor's Note
In This Issue. Federal agencies issued a joint statement regarding an orderly transition away from the London Interbank Offered Rate (LIBOR); the Office of the Comptroller of the Currency (OCC) issued an updated self-assessment tool for banks to evaluate their preparedness for the cessation of LIBOR; the Interest Rate Benchmark Reform Subcommittee, a subcommittee of the Commodity Futures Trading Commission’s Market Risk Advisory Committee (MRAC), will switch interdealer trading conventions from LIBOR to Secured Overnight Financing Rate (SOFR) for USD non-linear derivatives; Financial Crimes Enforcement Network (FinCEN) issued a Financial Trend Analysis finding rapid growth in ransomware-related Suspicious Activity Reports (SARs); and the U.S. Department of Labor (DOL) announced an ERISA-related proposed rule to remove ESG-related barriers. These developments are discussed in more detail below. 
Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

Federal Agencies Issue Joint Statement on Managing the LIBOR Transition

On October 20, the federal financial institution regulatory agencies, in conjunction with the state bank and credit union regulators, issued a statement to emphasize the importance of an orderly transition away from LIBOR. Additionally, the statement includes clarification regarding new LIBOR contracts, considerations when assessing appropriateness of alternative reference rates, and expectations for fallback language. The statement warns that failure to adequately prepare for LIBOR’s discontinuance could undermine financial stability and institutions’ safety and soundness and create litigation, operational, and consumer protection risks.

LIBOR Transition: Updated Self-Assessment Tool for Banks

On October 18, the OCC issued an updated self-assessment tool for banks to evaluate their preparedness for the cessation of LIBOR. While banks may use any replacement rate they determine to be appropriate for their funding model and customer needs, the OCC’s supervisory efforts will initially focus on non-SOFR rates. Bank management should tailor the bank’s risk management process to the size and complexity of the bank's LIBOR exposures

Bank management should use the updated self-assessment tool to evaluate whether:

  • The rate always reflects competitive forces of supply and demand and is anchored by a sufficient number of observable arm’s-length transactions, during all market conditions including periods of stress;
  • The rate’s underlying historical data are extensive, spanning a variety of economic conditions;
  • The rate’s administrator maintains durable methodology and governance processes to ensure the quality and integrity of the benchmark through periods of market stress;
  • The rate’s transparency provides market participants the ability to understand the methodology, permitting them to independently substantiate the rates published; and
  • The market for financial instruments that use the rate is sufficiently liquid to allow for the effective management of market risk.

New or modified financial contracts should have fallback language that permits efficient rate replacement that is clearly identified in the contractual terms. Bank management should consider and prepare for all applicable risks such as operational, compliance, strategic, and reputation when scoping and completing LIBOR cessation preparedness assessments.

CFTC’s Interest Rate Benchmark Reform Subcommittee Selects November 8 for SOFR First for Non-Linear Derivatives 

Under MRAC’s SOFR First Initiative, interdealer brokers will be encouraged to change USD non-linear derivative trading conventions to SOFR starting November 8. Dealers will be encouraged to specify physical settlement for SOFR-based swaptions until a benchmark for SOFR swap rates is published in a tradeable form and ISDA publishes updated settlement provisions for the USD SOFR ICE Swap Rate. While dealers may still execute USD LIBOR non-linear derivatives with clients after November 8, 2021, the U.S. banking regulators’ guidance states that dealers should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. For SOFR First purposes, USD non-linear derivatives include swaptions, caps and floors. Other products like exotic options, Bermudan options and constant maturity swaps are not included, and may continue trading in the interdealer market after November 8, 2021. The fourth and last phase of SOFR First will involve exchange-traded derivatives with timing to be determined.

FinCEN Issues Report on Ransomware Trends in Bank Secrecy Act Data

On October 15, FinCEN issued a Financial Trend Analysis (FTA) identifying ransomware as a particularly acute cybercrime concern and increasing threat to the U.S. financial sector, businesses and the public, with recent attacks targeting various sectors, including manufacturing, legal, insurance, healthcare, energy, education, and the food supply chain in the U.S. and across the globe. The FTA reported rapid growth in ransomware-related SARs filed monthly between January and June 2021, up 30% from the total of SARs filed during the entire 2020 calendar year, and identified bitcoin as the most common ransomware-related payment method in reported transactions. FinCEN’s FTA concludes with recommendations for detection and mitigation of ransomware attacks.

DOL Proposes Rule to Remove ESG-related Barriers in Plan Management

On October 13, the U.S. Department of Labor announced a proposed rule that would remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights. ERISA fiduciaries are meant to act in the interest of the plan participants and beneficiaries. Under the Trump Administration, ERISA fiduciaries were allowed to select investments solely based on the consideration of pecuniary factors and were prohibited from adding or retaining any investment fund, product, or portfolio if such fund, product or portfolio reflected non-pecuniary objectives or investment strategies. The DOL’s proposed rule seeks to remedy the Trump-era additions by allowing ERISA fiduciaries to evaluate the economic effects of ESG factors on any particular investment. The comment period runs for 60 days after publication in the Federal Register. 

“A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.” 
– Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar

Goodwin News

Consumer Financial Services Enforcement Outlook Webinar

Nine months after President Biden nominated Rohit Chopra to lead the Consumer Financial Protection Bureau (CFPB), the Senate has now officially confirmed him. Goodwin partners in our Consumer Financial Services Enforcement & Litigation practice will discuss this leadership change and address some top-of-mind questions, including:

  • Does Rohit Chopra's appointment affect the CFPB’s areas of focus?
  • Are there other offices or agencies whose emphasis aligns with the CFPB’s (i.e., NYDFS)? Will there be new regulations, and if so, where?
  • What will this mean for financial institutions, and how can they prepare?

Register for the webinar, which will take place on October 28, 2021 at 11:30 AM EST.

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Editors
Nicole Griffin
Samantha M. Kirby
William E. Stern

Contributors
Joshua Burlingham
Rose Phipps
Serene Qandil