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IM Statement Urges Funds to Prepare for Impact of Libor Transition

The SEC announced the release of a staff statement that encourages market participants to manage their transition away from Libor, which is expected to be discontinued after 2021. “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,” Chairman Jay Clayton said in the SEC’s release. The SEC staff statement outlined an extensive list of questions for firms to consider as they seek to understand and mitigate the risks related to the transition from Libor. The Division of Investment Management said it is actively monitoring the impact that the expected discontinuation of Libor will have on funds and advisers, particularly those that invest in instruments referencing Libor, such as floating rate debt, bank loans, Libor-linked derivatives, and certain asset-backed securities. IM encouraged affected funds to provide investors with tailored risk disclosure that specifically describes the impact of the transition on their holdings.  “The discontinuation of LIBOR may impact the functioning, liquidity, and value of these investments. Funds should consider assessing any impact on the liquidity of their investments, including how those investments are classified and whether this could alter the effectiveness of their liquidity risk management programs, to ensure compliance with Rule 22e-4 under the Investment Company Act of 1940,” according to the staff statement. Closed-end funds and BDCs that engage in direct lending may need to renegotiate the terms of contracts extending past 2021 that do not address the discontinuation of Libor, according to IM.  In addition, funds that have received exemptive orders that reference Libor (such as certain interfund lending orders) should consider evaluating possible implications for terms and conditions of their relief. Meanwhile, the Wall Street Journal reported that New York Fed President John Williams called on financial firms to speed their transition to a new reference interest-rate system to replace Libor. Williams discussed joint efforts by the Federal Reserve and the financial industry to create a replacement for Libor, specifically the Secured Overnight Financing Rate, or SOFR.

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