The state Department of Financial Services wants credit unions and other financial institutions to prepare now for the upcoming transition from the London Interbank Offered Rate—undisputedly the most-used short-term lending benchmark in the world—to the Secured Overnight Financing Rate to calculate interest rates. LIBOR is expected to be phased out as early as 2021, with the SOFR expected to take its place as the preferred alternative.

DFS Superintendent Linda A. Lacewell said New York-regulated depository and non-depository institutions, insurers and pension funds should submit their plans for managing the risks relating to the likely discontinuation of LIBOR, in a Dec. 23 industry letter.

Below is the full press release from the DFS announcing the industry letter:

NEW YORK − Financial Services Superintendent Linda A. Lacewell today announced that the New York State Department of Financial Services (DFS) is directing New York-regulated depository and non-depository institutions, insurers and pension funds to submit their plans for managing the risks relating to the likely discontinuation of the London Interbank Offered Rate (LIBOR) at the end of 2021.

LIBOR is widely used to price a vast number of loans, derivatives and securities transactions.  According to estimates, the value of all financial products linked to U.S. dollar LIBOR is approximately $200 trillion, including $3.4 trillion of business loans, $1.3 trillion of consumer loans (held by about four million retail consumers) and $1.2 trillion of residential mortgage loans. The remaining 95% of exposures are in derivative contracts, notably interest rate swaps.

“Our financial institutions with LIBOR exposure need to prepare to manage the significant risks associated with its likely cessation, and be ready to transition to alternative reference rates,” Superintendent Lacewell said.

With this letter, the Department is taking action to ensure that regulated institutions’ boards of directors, or the equivalent governing authorities, and senior management fully understand and have assessed the risks associated with the potential cessation of LIBOR, have developed an appropriate plan to manage them, and have initiated actions to facilitate transition to alternative reference rates.

DFS is requiring its regulated depository and non-depository institutions, insurers, and pension funds to submit to the Department their plans to address their LIBOR transition risk management plan by February 7, 2020.

To read the full letter, visit the DFS website.