Regulators are starting to freak out a little over what will happen in U.S. financial markets in 2021 when a major benchmark interest rate is expected to vanish.

The Securities and Exchange Commission recently issued guidance to registrants telling them preparing for new reference rates to underpin trillions of dollars in financial contracts is becoming a matter of some “urgency.” Commission staff is “actively monitoring the extent to which market participants are identifying and addressing these risks,” the guidance says.

The Federal Reserve is also getting antsy to see more progress, evidenced by recent remarks from its vice chair for supervision, Randal Quarles. “Regardless of how you choose to transition, beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients,” he said.

The reference rate expected to pass into history is commonly known as LIBOR, an acronym for the London Interbank Offered Rate. Established by the Financial Conduct Authority in the United Kingdom based on submissions from numerous large banks, it is a daily rate in multiple terms referencing multiple currencies that establishes an average interest rate used by banks as they borrow from one another.

LIBOR is used extensively as a benchmark to determine lending terms on products ubiquitous to U.S. markets, such as corporate and municipal bonds, variable-rate loans, asset-backed securities, and many derivatives. After discoveries of manipulation, U.K. authorities ultimately determined they would no longer require banks to provide the reporting necessary to support LIBOR after 2021, suggesting its veracity as a benchmark rate would disappear.

U.S. authorities formed the Alternative Reference Rates Committee to determine a suitable U.S. currency-based replacement for LIBOR, which the committee says is the reference for some $200 trillion in notional transactions in the cash and derivatives market alone, nearly 20 percent of which extends beyond 2021. Now the SEC is telling public companies they need to scour their balance sheets searching for instruments indexed to LIBOR so they can begin to plan a transition to something new, and they need to describe their risks to investors.

“The expected discontinuation of LIBOR could have a significant impact on the financial markets and may present a material risk for certain market participants, including public companies, investment advisers, investment companies, and broker-dealers,” the SEC wrote. “The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner.”

And the SEC staff made it clear they’re not talking exclusively to banks, which have started to provide some disclosure about LIBOR risks. For every contract held by an institution that is disclosing something, “there is a counterpart that may not yet be aware of the risks it faces or the actions needed to mitigate those risks,” the SEC wrote. “We therefore encourage every company, if it has not already done so, to begin planning for this important transition.”

Effecting an orderly transition is a tall order, however, as the ARRC has not settled on a widely accepted replacement for LIBOR in the U.S. Authorities and task forces in other countries also have not determined certain replacements in their respective currencies, nor replacements for other lesser quoted benchmarks in addition to LIBOR that are also phasing out.

The Secured Overnight Financing Rate, or SOFR, is the ARRC’s choice to replace LIBOR for U.S. currency, but it has limitations, says William Fellows, a partner in Deloitte’s risk and financial advisory services. It doesn’t offer the same term structure as LIBOR, and there’s less liquidity behind the rate to give it the weight of a benchmark. Volatility is also a concern broadly.

In the meantime, LIBOR is still heavily referenced in newly written contracts, although often with fallback language to address what happens to a given arrangement in the event LIBOR goes away. “The concerns are being worked on,” Fellows says.

Also tricky in any transition, the end of 2021 is not a hard stop for LIBOR, and some in the financial services sector would like to resuscitate the longstanding benchmark. “The regulator of LIBOR has said that it is a matter of how LIBOR will end rather than if it will end, and it is hard to see how one could be clearer than that,” said Quarles in his remarks, hoping to quell such hopes.

“Regardless of how you choose to transition [from LIBOR], beginning that transition now would be consistent with prudent risk management and the duty that you owe to your shareholders and clients.”

Randal Quarles, Vice Chair for Supervision, Federal Reserve

Another unsettled issue rests in accounting standards, which prescribe consequences when critical terms in financial contracts are modified, especially in hedging. The Financial Accounting Standards Board is working on a solution.

“This is really, really big and really complex,” says Paul Noring, managing director and co-lead of the banking, insurance, and capital markets practice at Navigant Consulting. “This is much bigger than implementing any accounting standard that has ever come down.”

Despite uncertainties about what ultimately will replace LIBOR in the United States, the SEC is urging companies to get busy charting a course. “For many market participants, waiting until all open questions have been answered to begin this important work likely could prove to be too late to accomplish the challenging task required,” the SEC staff wrote.

There are plenty of initial steps companies can take to prepare for a transition before a path to a new reference rate is settled, says Noring. “One of the first big things to do, as with any change initiative, is to establish a robust governance and planning process around this,” he says. “Get it on the board agenda, then start allocating work teams to tackle it.”

Companies need to get active in at least identifying where their LIBOR exposures exist in financial contracts and relationships with clients, says Fellows. “If you have contracts that need amending, know what the terms are and be ready to begin negotiations.”

Ernie de Lachica, senior director at BDO USA, is advising companies to perform their risk assessments and identify the potential impacts this year. “You should be trying to determine what is your roadmap going forward,” he says.

By early next year, he says, entities should be prepared to determine what they need to do to transition any existing contracts or arrangements to something other than LIBOR, says de Lachica. That may involve rewriting some contracts to either add fallback language or agree to new terms. “That could take the better part of next year,” he says.

Beyond contract modifications, companies also will need to identify systems changes that may be required, says de Lachica. “Say you have systems that perform a lot of valuation functions for numerous areas,” he says. “You have to take a closer look at that system and make sure it is capable of addressing the changes that are coming—that it’s not LIBOR dependent any longer.” Systems that track payments a company makes or receives might also be affected.

David Lucking, a partner and head of international capital markets at law firm Allen & Overy, sees companies beginning their analysis of existing contracts that will not mature or expire before the expected sunset of LIBOR as well as new contracts they enter. Some are also digging into operational implications in addition to systems issues.

Changes in arrangements could lead to changes in cash flows and liquidity, some of which might also produce tax consequences, for example. “You might think this is just an amendment to contracts, but it has all these knock-on effects,” says Lucking. “It sounds easy, but it can be a daunting task.”

Stephen Newman, a partner at law firm Stroock & Stroock & Lavan, is surprised the issue hasn’t yet taken on greater importance, particularly in financial services, where it is most pervasive. “I don’t think anyone fully understands the scope of the issue without digging into their forms to figure out what they have in their portfolio and what it says,” he says.