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FINRA Shares LIBOR Transition Preparation Practices of Broker-Dealers

FINRA has published helpful survey results on the preparedness of member firms for the anticipated cessation of LIBOR at the end of 2021.

On August 5, 2020, FINRA published Regulatory Notice 20-26, summarizing the results of a survey FINRA conducted of a representative cross-section of member firms, including firms with significant trading volumes or positions in LIBOR-linked securities. The survey sought information on how those firms are preparing for the transition from LIBOR to an alternative reference rate at the end of next year. 

This follows the recent announcement by the SEC's Office of Compliance Inspections and Examinations of its Examination Initiative on LIBOR Transition Preparedness, discussed in our recent Commentary, "SEC Staff Announces Examination Initiative on LIBOR Transition Preparedness." Although the Notice is directed toward broker-dealers, investment advisers whose clients' holdings include LIBOR-linked instruments (and fixed-rate products that might nevertheless be implicated by LIBOR's cessation) may find some of the information instructive for their own transition plans.

The cessation of LIBOR may result in increased operational, compliance, accounting, and litigation risks to broker-dealers. Therefore, FINRA identified the LIBOR transition as a 2020 examination priority and also indicated that it would engage with firms outside the examination program, including through this survey, to better understand how firms were preparing to transition. 

According to FINRA, the survey found that some large firms had implemented extensive programs to prepare for the LIBOR transition, but others had done much less. Nevertheless, FINRA published some of the practices of its surveyed firms in six areas—governance frameworks, financial risk, operational risk, alternate reference rates, legal risk, and staff training and customer education—to help FINRA members understand better the sheer scope of the LIBOR transition problem and how they compare to their peers in terms of addressing those issues. The Notice provides a useful checklist of considerations firms may want to use in conjunction with the listed practices to evaluate their preparedness for the transition. 

Because addressing LIBOR transition issues is not a one-size-fits-all exercise, FINRA emphasized that firms should determine which of the practices listed in the Notice, if any, are applicable to their business and their potential exposure. The Notice serves as yet another reminder that, to the extent firms have not started to prepare for a post-LIBOR world, they may need to move more quickly and/or broaden their current efforts. In short, the runway needed to prepare for the LIBOR transition is getting shorter every day, and firms can no longer delay adequately preparing for the transition.

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