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OCC Bulletin 2021-46
October 18, 2021
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Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties
This bulletin provides an updated self-assessment tool for banks 1 to evaluate their preparedness for the cessation of the London Interbank Offered Rate (LIBOR).
This bulletin rescinds OCC Bulletin 2021-7, “Libor Transition: Self-Assessment Tool for Banks,” published on February 10, 2021, and replaces the tool attached to OCC Bulletin 2021-7.
This bulletin applies to community banks, but the applicability of some concepts depends on the nature and extent of a bank's LIBOR exposure.
Bank management can use this self-assessment tool to evaluate the bank’s risk management process for identifying and mitigating LIBOR transition risks.
The OCC expects banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and no later than December 31, 2021. When assessing preparedness
On September 8, 2021, the International Organization of Securities Commissions (IOSCO) issued a statement on credit sensitive rates, reiterating the importance of transitioning to robust alternative financial benchmarks and reminding benchmark rate administrators that demonstrating compliance with the IOSCO principles is not a one-time exercise.2 The IOSCO specifically highlighted Principles 6 and 7, calling on benchmark rate administrators to assess whether benchmarks are based on active markets with high volumes of transactions and whether such benchmarks are resilient during times of stress. The IOSCO cited concern that some of LIBOR’s shortcomings may be replicated through the use of credit sensitive rates that lack sufficient underlying transaction volumes. The OCC shares those concerns. In addition, from a macroprudential perspective the Financial Stability Board (FSB) has noted that “to ensure financial stability, benchmarks which are used extensively must be especially robust.”3
The IOSCO’s focus on compliance with the principles is an important reminder to banks to select rates that are robust, resilient, and reliable at all times, particularly in times of market stress. The OCC expects banks to 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. The IOSCO noted that the Secured Overnight Financing Rate (SOFR) provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives. While banks may use any replacement rate they determine to be appropriate for their funding model and customer needs,4 OCC supervisory efforts will initially focus on non-SOFR rates.
The updated self-assessment tool includes questions and considerations regarding replacement rates’ robustness. In particular, when assessing a replacement rate, bank management should evaluate whether
Bank management should continually monitor the rates it uses for uninterrupted availability. If future circumstances limit any rate’s availability, it may be necessary for bank management to change affected contracts to a different rate. New or modified financial contracts should have fallback language that permits efficient rate replacement that is clearly identified in the contractual terms. Management should have an internal process to assess a rate’s availability and to prepare the bank to transition to a different reference rate if necessary.
Please contact Ang Middleton, Risk Specialist, or Chris McBride, Director, Treasury and Market Risk Policy, at (202) 649-6360.
Grovetta N. Gardineer
Senior Deputy Comptroller for Bank Supervision Policy
1 "Banks" refers collectively to national banks, federal savings associations, and federal branches and agencies of foreign banking organizations.
2 Refer to The Board of the IOSCO, “Statement on Credit Sensitive Rates” (September 8, 2021).
3 Refer to FSB, “Interest rate benchmark reform: Overnight risk-free rates and term rates” (June 2, 2021).
4 For example, refer to OCC Bulletin 2020-98.