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Member Bulletin

  • February 02, 2022
  • Bulletin No: 2022-04

Requirement to Have Adequate Fallback Language for LIBOR-Indexed Loans and Securities Pledged as Collateral

On March 5, 2021, the United Kingdom’s Financial Conduct Authority announced that the most commonly used U.S. dollar (USD) LIBOR (London Interbank Offered Rate) settings (i.e., overnight and one-, three-, six- and 12-month USD LIBOR) will cease publication after June 30, 2023. On October 20, 2021, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the National Credit Union Administration and the Consumer Financial Protection Bureau, in conjunction with the state bank and state credit union regulators (collectively, Agencies), issued a Joint Statement on Managing the LIBOR Transition which, among other things, emphasized the Agencies’ expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR.

In preparation for the phase out of LIBOR, the Federal Home Loan Bank of Dallas (Bank) encourages all members to examine fallback language contained in contracts for LIBOR-indexed loans and securities collateral, and to take appropriate actions in 2022 to mitigate risks associated with inadequate fallbacks.

In addition, on and after January 1, 2023, the Bank will require all LIBOR-indexed loans and securities that mature after June 30, 2023 to carry adequate fallback language in order to be accepted as eligible collateral. As recommended by the Alternative Reference Rates Committee (ARRC), the Bank defines adequate fallback language as:

  • Language provided in the contract that specifies how the rate will be determined in the event of LIBOR permanent cessation, and
  • The fallback index, if specified, is a widely available market standard reference rate, or
  • The contract grants the member exclusive right to choose a widely available market standard reference rate.
In 2023, the Bank’s collateral verifications will examine whether a member’s LIBOR-indexed collateral has been modified to use a widely available market standard reference rate, or if such collateral carries adequate fallback language as defined above.

For guidance in preparing fallback language for contracts that reference USD LIBOR, members are encouraged to refer to the Fallback Contract Language resources provided by ARRC. An industry paper recently published by Ernst & Young could also be helpful to you.

Michael Zheng
EVP, Chief Credit Officer