The Division of Examinations at the Securities and Exchange Commission (SEC) on Thursday issued a risk alert to aid registered investment advisers and investment companies in their transition efforts away from the London Interbank Offered Rate (LIBOR).
U.S. dollar LIBOR panels end June 30, and many firms are still confronting significant direct exposure to LIBOR-linked contracts, the SEC observed. New contracts referencing LIBOR haven’t been available since the end of 2021, when the U.K. Financial Conduct Authority put the nail in the coffin of the benchmark interest rate.
The decision to move away from LIBOR was made following discoveries of manipulation of the rate. The United States has since moved forward with the Secured Overnight Financing Rate (SOFR) as a replacement.
The SEC examined how registered investment advisers and investment companies were preparing for the cessation of LIBOR. The agency highlighted the following risk management practices it observed:
- Treatment of the transition as an enterprise risk governance matter, including by forming working groups and carrying out impact assessments on investment and operational exposures.
- Reliance on guidance from the Alternative Reference Rates Committee, which identified SOFR as the preferred alternative to LIBOR.
- Internal training and guidance for traders, portfolio managers, and client-facing representatives regarding LIBOR transition efforts.
The risk alert also offered examples of transition efforts regarding operations, portfolio management, investor communications, and keeping employees informed of the latest firm challenges.
“Firms have made significant efforts to prepare for the transition away from LIBOR, implementing a variety of practices depending on their business models and client base,” the risk alert concluded. “Additionally … several challenges exist to a smooth and orderly transition away from LIBOR. The division encourages all firms to be aware of such issues, including consideration of the resources necessary to address them, and to act consistent with their fiduciary obligations as they continue in the transition process.”