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Regulatory Watch

SEC Highlights Libor Transition Risks

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July 22, 2019

SEC alert says it will keep an eye on company preparedness for Libor transition.

Money and GavelThe Securities and Exchange Commission (SEC) recently weighed in on the transition away from Libor, pointing out several risks that companies should consider and noting that it will be watching their progress in dealing with them.

“The Commission staff is actively monitoring the extent to which market participants are identifying and addressing these risks,” the SEC says in its public statement issued July 12.

SEC Chairman Jay Clayton said that the transition away from Libor is gaining traction, but, as the SEC statement makes clear, significant work by market participants still needs to be done.

“The risks the statement highlights deserve careful attention and I draw particular attention to the staff’s observation: '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,'” Mr. Clayton said.

Focusing on corporate disclosures. In the statement, each of the SEC’s divisions details how the discontinuation of Libor could impact specific types of registrants and provides guidance on how they may respond to the risk. The Division of Corporate Finance notes that a number of existing rules or regulations may require disclosure related to the anticipated discontinuation of Libor, including the disclosure of risk factors, management’s discussion and analysis, board risk oversight, and financial statements.

In determining which disclosures are relevant and appropriate, the division provided several suggestions:

  • Given the discontinuation of Libor risk may span several reporting periods, companies may want to disclose the status of the company’s efforts to date and significant matters still to be address.
  • Consider disclosing when the company identifies a material exposure to Libor but cannot yet determine the likely impact.
  • Consider sharing information used by management and the board about how the transition away from Libor may impact the company, since that’s likely to be the most useful to investors. Such information could include qualitative disclosures and quantitative disclosures, such as the notional value of contracts referencing Libor that extend past 2021, when banks’ reporting commitment ends and the reference rate is expected to no longer be published. 

Some industries provide more pertinent disclosures. The SEC’s statement said that the companies now most often providing Libor-transition disclosures are in the real estate, banking and insurance industries, and larger companies are also more likely to address the issue.

“However, for every contract held by one of these companies providing disclosure, there is a counterparty that may not yet be aware of the risks it faces or the actions needed to mitigate those risks,” the statement says.

Accounting-related issues also under scrutiny. The SEC is also monitoring financial statement preparers and auditors, accounting standard setters and other regulators in terms of how they’re addressing accounting issues that may stem from the transition. It adds that those issues could include:

  • Modifications of terms within debt instruments.
  • Hedging activities
  • Inputs used in valuation models
  • Potential income-tax consequences

The statement says that the Financial Accounting Standards Board recently began a project to address potential accounting and reporting implications relating to Libor’s discontinuation. It has also notes that the International Accounting Standards Board recently proposed that addresses various hedge-accounting issues leading up to the replacement of an existing interest-rate benchmark.

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