SR 21-19: A Guide to LIBOR Transition Supervisory Expectations

Table of Contents#

1. What is SR 21-7?
2. Key Supervisory Expectations
   • 2.1 Governance and Oversight
   • 2.2 Risk Management
   • 2.3 Contractual Remediation
   • 2.4 Communication and Transparency
   • 2.5 Operational Readiness
3. Implications for Financial Institutions
4. Challenges and Best Practices
5. Conclusion
6. References

What is SR 21-7?#

SR 21-7, formally titled “Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR”, is a supervisory letter issued by the Federal Reserve Board on March 9, 2021. It builds on earlier guidance (e.g., SR 20-27, the Interagency Statement on LIBOR Transition from November 2020) and targets all supervised financial institutions, including state member banks, bank holding companies, savings and loan holding companies, and U.S. branches of foreign banks.

Purpose#

The primary goal of SR 21-7 is to ensure institutions manage the LIBOR transition in a "safe and sound manner" by addressing risks like legal uncertainty, operational disruptions, and financial losses. Regulators recognized that a disorderly transition could threaten financial stability, so SR 21-7 provides a framework for proactive planning. The guidance includes separate examiner frameworks for institutions with less than $100 billion in total consolidated assets and those with$100 billion or more, reflecting the differing complexity of their LIBOR exposures.

Additional key Federal Reserve SR letters on LIBOR transition include:

• SR 21-12 (July 29, 2021): Answers to Frequently Asked Questions on the Transition Away from LIBOR
• SR 21-17/CA 21-15 (October 20, 2021): Interagency Statement on Managing the LIBOR Transition
• SR 23-2/CA 23-3 (April 26, 2023): Joint Statement on Completing the LIBOR Transition

Key Supervisory Expectations#

SR 21-7 outlines six core areas of focus for institutions. Below is a detailed breakdown of each:

2.1 Governance and Oversight#

Regulators expect institutions to establish clear accountability for the LIBOR transition at the highest levels of the organization.

• Board and Senior Management Involvement: The board of directors and senior management must actively oversee transition efforts. This includes reviewing transition plans, monitoring progress, and ensuring adequate resources (budget, staff, technology) are allocated.
• Transition Plan: Institutions must develop a written transition plan with specific milestones, timelines, and responsibilities. The plan should cover all LIBOR-linked products, systems, and processes (e.g., loans, derivatives, securitizations).
• Accountability: Assign a senior executive (e.g., Chief Risk Officer or Chief Financial Officer) to lead the transition and report regularly to the board.

2.2 Risk Management#

LIBOR transition introduces multiple risks, and SR 21-7 requires institutions to identify, assess, and mitigate these proactively.

• Risk Identification: Map all LIBOR exposures, including "tough legacy" contracts (those maturing after LIBOR's cessation with no fallback language). Risks include:
  • Legal Risk: Disputes over contract terms if LIBOR is unavailable.
  • Operational Risk: System failures or errors when switching to ARRs.
  • Credit Risk: Changes in borrowing costs for customers due to ARR differences (e.g., SOFR is a secured rate, unlike LIBOR).
  • Liquidity Risk: Disruptions in funding markets if LIBOR-linked instruments lose value.
• Risk Mitigation: Implement controls to address identified risks. For example, use stress testing to model the impact of ARR adoption on earnings and capital.

2.3 Contractual Remediation#

A critical challenge is updating contracts to replace LIBOR with ARRs. SR 21-7 emphasizes the need to address both new and existing contracts.

• New Contracts: By December 31, 2021, institutions were expected to stop using LIBOR in new contracts (or include robust fallback language if LIBOR is unavoidable). Fallbacks should specify a clear ARR (e.g., SOFR) and adjustment mechanism (e.g., spread adjustments to account for LIBOR's credit component).
• Legacy Contracts: For contracts maturing after June 30, 2023 (the final USD LIBOR cessation date), institutions must actively remediate "tough legacy" contracts (those without fallbacks). This may involve amending contracts, using statutory safe harbors (e.g., the Adjustable Interest Rate (LIBOR) Act, signed into law in March 2022), or working with counterparties to agree on ARRs. The Federal Reserve issued a final rule in December 2022 implementing the LIBOR Act, establishing SOFR-based benchmark replacements for tough legacy contracts governed by U.S. law.

2.4 Communication and Transparency#

Institutions must communicate openly with stakeholders to manage expectations and reduce uncertainty.

• Clients and Counterparties: Proactively inform customers about changes to LIBOR-linked products, including how ARRs will affect their loans or investments. Provide clear explanations of fallback terms and potential cost impacts.
• Regulators: Regularly update supervisors on transition progress, including challenges (e.g., slow remediation of legacy contracts) and risk mitigation strategies.
• Public Disclosures: For publicly traded institutions, disclose transition risks and progress in financial reports (e.g., 10-Ks, 10-Qs) to keep investors informed.

2.5 Operational Readiness#

Transitioning to ARRs requires updates to systems, processes, and staff training. SR 21-7 mandates operational preparedness.

• Systems and Technology: Upgrade core systems (e.g., loan servicing, trading platforms, accounting software) to process ARRs. Test systems to ensure they can handle ARR calculations, interest accruals, and reporting.
• Data Management: Ensure data systems can capture ARR-related information (e.g., SOFR rates, spread adjustments) and integrate with risk models.
• Staff Training: Train employees (e.g., relationship managers, traders, compliance officers) on ARRs, fallback language, and transition processes to avoid errors.

Implications for Financial Institutions#

Non-compliance with SR 21-7 and related interagency guidance could have led to supervisory actions, including formal enforcement (e.g., consent orders), reputational damage, or financial losses. Regulators made it clear that institutions with inadequate transition plans would face increased scrutiny.

The interagency joint statement issued October 20, 2021 (SR 21-17/CA 21-15) explicitly warned that failure to adequately prepare for LIBOR's discontinuance could "undermine financial stability and institutions' safety and soundness and create litigation, operational, and consumer protection risks." Proactive compliance not only avoided penalties but also positioned institutions to maintain customer trust and operational resilience.

Today, with the LIBOR transition fully complete, institutions that prioritized early preparation have demonstrated the value of adhering to supervisory expectations. The successful transition—moving an estimated $400 trillion in financial contracts away from LIBOR—stands as one of the most significant regulatory achievements in modern financial history.

Challenges and Best Practices#

Common Challenges#

• Tough Legacy Contracts: Many older contracts lack fallback language, requiring time-consuming negotiations with counterparties.
• System Complexity: Upgrading legacy systems to support ARRs can be costly and time-intensive, especially for large institutions with diverse product lines.
• Client Education: Customers may be unfamiliar with ARRs, leading to resistance or confusion.

Best Practices#

• Start Early: Begin remediation and system updates well before LIBOR's cessation to avoid last-minute rushes.
• Leverage Industry Guidance: Follow frameworks from the Alternative Reference Rates Committee (ARRC) for fallback language and transition tools. The ARRC published a Closing Report in 2023 with final reflections on the transition.
• Collaborate Internally: Form cross-functional teams (risk, legal, IT, business lines) to ensure alignment.
• Test Rigorously: Conduct end-to-end testing of systems and processes to identify gaps before LIBOR is phased out.

Conclusion#

The Federal Reserve's LIBOR transition supervisory guidance, led by SR 21-7 and supported by SR 21-12, SR 21-17, and SR 23-2, provided a critical roadmap for financial institutions navigating one of the most complex transitions in financial market history. By prioritizing governance, risk management, contractual remediation, communication, and operational readiness, institutions were able to mitigate risks and ensure a smooth shift to ARRs.

With all 35 LIBOR settings having permanently ceased by September 30, 2024, the transition is now complete. SOFR has emerged as the dominant U.S. dollar interest rate benchmark, with the New York Fed publishing it each business day. The successful completion of this transition—moving away from a rate once embedded in an estimated $400 trillion of financial contracts—demonstrates the effectiveness of coordinated regulatory action and industry collaboration.

Looking forward, market participants should continue to ensure they use robust reference rates and maintain appropriate fallback language, as recommended by the ARRC's Closing Report. The lessons learned from the LIBOR transition will inform how the financial industry approaches future benchmark challenges.

References#

• Federal Reserve Board. (2021). SR 21-7: Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR. https://www.federalreserve.gov/supervisionreg/srletters/SR2107.htm
• Federal Reserve Board. (2021). SR 21-12: Answers to Frequently Asked Questions on the Transition Away from LIBOR. https://www.federalreserve.gov/supervisionreg/srletters/sr2112.htm
• Federal Reserve Board. (2021). SR 21-17/CA 21-15: Interagency Statement on Managing the LIBOR Transition. https://www.federalreserve.gov/supervisionreg/srletters/SR2117.pdf
• Federal Reserve Board. (2023). SR 23-2/CA 23-3: Joint Statement on Completing the LIBOR Transition. https://www.federalreserve.gov/supervisionreg/srletters/SR2302.htm
• Federal Reserve Board. (2022). Regulations Implementing the Adjustable Interest Rate (LIBOR) Act. https://www.federalregister.gov/documents/2023/01/26/2023-00213/regulations-implementing-the-adjustable-interest-rate-libor-act
• Alternative Reference Rates Committee (ARRC). (2023). ARRC Closing Report: Final Reflections on the Transition. https://www.newyorkfed.org/arrc
• Bank of England. (2024). The end of LIBOR. https://www.bankofengland.co.uk/news/2024/october/the-end-of-libor
• Office of the Comptroller of the Currency (OCC). LIBOR Transition. https://www.occ.gov