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In a statement on the discontinuation of LIBOR, the SEC staff noted the risks associated with the transition from LIBOR to alternative reference rates. The staff encouraged market participants to stay informed regarding the activities of working groups such as the Alternative Reference Rates Committee ("ARRC") and to begin managing the transition away from LIBOR.
Existing Contracts
The staff highlighted the need for market participants to identify LIBOR-based contracts that extend beyond 2021 in order to understand and mitigate associated risks, including (i) whether LIBOR-based contracts are individually or in the aggregate material, (ii) how the discontinuance of LIBOR will affect the operation of such contracts, (iii) the risk of flawed fallback language and (iv) the need to select alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR") (and risks associated with use of such a replacement rate). The staff also said market participants should consider how the discontinuance and replacement of LIBOR might affect profitability or costs, and the impact on LIBOR-based hedges and the company's hedging strategy.
New Contracts
For new contracts, the staff advised market participants to consider using an alternative rate to LIBOR, such as SOFR, or including effective fallback language.
In addition to the impact on existing and new contracts, the staff encouraged market participants to identify, evaluate and mitigate the consequences of LIBOR discontinuation on business strategy, products, processes and information systems.
Risk Disclosure
The staff also stressed that generic risk disclosure regarding the discontinuation of LIBOR is not sufficient, and that uncertainty of impact and resolution of issues is not a basis to postpone disclosure.
Division-Specific Guidance
The Public Statement also contained guidance from the Divisions of Corporate Finance ("CF"), Investment Management ("IM") and Trading and Markets ("TM"), and the Office of the Chief Accountant ("OCA"), on how the discontinuance of LIBOR may impact specific registrants.
In the context of CF, the discontinuance of LIBOR may necessitate disclosure in risk factors, management's discussion and analysis, board risk oversight, and financial statement disclosure. Useful disclosure would cover a company's efforts to date, including significant matters yet to be addressed, as well as disclosure of material exposures (even if the estimated impact cannot yet be reasonably assessed) and how management is assessing and monitoring the transition.
IM is monitoring the impact on funds and advisors that invest in instruments referencing LIBOR and how discontinuance may affect the liquidity and value of these instruments. Funds and advisors are advised to consider providing tailored disclosure on how the discontinuance and transition will affect specific investments, and to avoid less helpful generic disclosures. Advisors should consider the effect that the discontinuation and replacement of LIBOR will have on floating rate instruments with maturities beyond 2021 that are held for, or recommended to, clients.
TM is monitoring the impact of the discontinuation of LIBOR on broker-dealers, central counterparties and exchanges. TM encouraged these entities to analyze how discontinuation and replacement will impact their business, systems, models processes, risk management frameworks and clients.
OCA is monitoring the activities of the preparers and auditors of financial statements, the Financial Accounting Standards Board and other standard-setters and regulators as they address financial reporting issues arising from the transition to a new benchmark, including the accounting and financial reporting of modifications of the terms of debt instruments, hedging activities, inputs in valuation models and potential tax consequences.
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