By Nicole D. Prysby, J.D.
FHFA has instructed FHLBanks to stop purchasing investments in certain LIBOR assets by the end of 2019 and by March 31, 2020, stop entering into all other LIBOR-based transactions involving products with maturities beyond December 31, 2021.
On September 27, 2019, the Federal Housing Finance Agency sent a supervisory letter to the 11 Federal Home Loan banks (FHL Banks) instructing them to begin the transition away from purchasing investments tied to the London Inter-Bank Offered Rate (LIBOR). By December 31, 2019, FHLBanks should stop purchasing investments in assets tied to LIBOR with a contractual maturity beyond December 31, 2021. By March 31, 2020, they should no longer enter into all other LIBOR-based transactions involving advances, debt, derivatives, or other products with maturities beyond December 31, 2021. FHFA anticipates the need for some exceptions and requested that the FHLBanks jointly submit a single list of LIBOR-indexed products maturing after 2021 that they would like to continue to use after March 31, 2020.
The Supervisory Letter instructs FHLBanks that by March 31, 2020, they should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021 for all product types except investments. For investments, FHLBanks should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. The phase-out dates do not apply to collateral accepted by FHLBanks.
Each FHLBank should report monthly beginning with October 2019 to the Division of FHLBank Regulation any new LIBOR-based transactions maturing after December 31, 2021 into which it enters. Each FHLBank should encourage its members to distinguish collateral linked to LIBOR with maturities beyond 2021 by updating collateral certification reporting requirements by March 31, 2020. As there may be LIBOR-indexed, long-dated products that serve a compelling mission, risk-mitigating, and/or hedging purpose that do not currently have readily available alternatives, the 11 FHLBanks should jointly submit a single list of LIBOR-indexed products maturing after 2021 that they would like to continue to use after March 31, 2020. For each product, the Banks should include a statement explaining how they will manage the risks the products present and how the products serve the mission of the FHLBanks.
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