On November 2, 2020, the Alternative Reference Rates Committee ("ARRC") sent a detailed memorandum ("Memorandum") to the Board of Governors of the Federal Reserve System ("FRB"), the Federal Deposit Insurance Corporation ("FDIC") and the Office of the Comptroller of the Currency ("OCC" and, together with the FRB and FDIC, the "Agencies") that summarizes the ARRC's preliminary findings and recommendations on the potential regulatory considerations with the application of current and anticipated capital and liquidity requirements in the context of the market transition from the use of the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR") as a contractual reference rate in the United States (the "Transition").
The Memorandum notes that a key policy goal of the Transition is to reduce overall risk in the financial system. The treatment of SOFR-based exposures under prudential capital and liquidity standards during and after the Transition should recognize this policy goal and ensure that prudential treatment of these exposures does not dis-incentivize timely and voluntary transition to SOFR. In general, if the Transition were to lead to unintended increases in capital and liquidity requirements, this would be at cross-purposes with the macro-prudential goal of mitigating risk of the financial system as a whole. To that end, the Basel Committee on Banking Supervision ("BCBS") has issued guidance in the form of FAQs ("BCBS June 2020 FAQs") that clarify application of certain international capital and liquidity standards in light of the transitions in many of its member jurisdictions from IBORs to risk-free rates ("RFRs").
The ARRC states in the Memorandum that it believes US regulators should similarly address these principles with respect to current US capital and liquidity regulatory requirements, as well as to future such requirements, such as quantitative impact studies of the implementation of the Fundamental Review of the Trading Book ("FRTB") because past studies may not have included a robust pro forma analysis reflecting the impact of the Transition and because the BCBS June 2020 FAQs are not legally operative in the United States.
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Originally published in REVERSEinquiries: Volume 3, Issue
9.
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