The Securities and Exchange Commission is planning an exam sweep to assess financial firms’ preparedness for the transition away from the former London Interbank Offered Rate, or LIBOR; the agency cited the transition as an exam program priority for FY 2020.
LIBOR is used extensively in the United States and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives, the agency explains in a recently released alert.
LIBOR is being replaced with another reference rate, which in the U.S. will mostly likely be the Secured Overnight Financing Rate (SOFR), developed by the Federal Reserve Bank of New York.
The discontinuation of LIBOR, currently expected to occur after 2021, “could have a significant impact on the financial markets and may present a material risk for certain market participants,” including SEC-registered investment advisors, broker-dealers, investment companies, municipal advisors, transfer agents and clearing agencies, the SEC explains in a recent alert.
“Preparation for the transition away from LIBOR is essential for minimizing any potential adverse effects associated with LIBOR discontinuation,” the SEC said.