LIBOR Transition

How is your organisation managing its LIBOR replacement efforts?

As a consequence of several well-documented scandals and questioning of its reliability, the London Interbank Offered Rate (LIBOR), which is the benchmark rate referenced by $350 trillion in bonds, loans, derivatives and securitisations worldwide, is set to phase out by the end of 2021, to be replaced by a variety of Alternative Reference Rates (ARRs).

The Libor replacement race!

So far, the SOFR (Secured Overnight Financing Rate) is being championed by the US Federal Reserve as a recommended alternative to USD Libor even though other reference rates are also lining up.

In any event, lenders and borrowers will no longer be able to enter into new USD LIBOR transactions after 2021, notwithstanding the fact that some rates will still be published until mid-2023, allowing two-thirds of outstanding bilateral loan contracts to naturally come to term.

The clock is indeed ticking for financial institutions around the world but not only; Investment managers, insurers and general corporates will also be heavily impacted, the magnitude of said impact inevitably linked to their respective states of readiness! The replacement is a 360-degree shift, implying that getting ahead of the transition and changing from LIBOR to ARRs will require that financial firms update front- and back-office systems, retrain staff, educate their customers and redesign processes.

The time is for action!

The LIBOR transition is disruptive enough for financial institutions not to feel a sense of urgency as the deadline approaches, in addition to the challenges of the global pandemic. One thing is certain however; the costs of failed readiness to transition are very high. Therefore, those steering their strategy and taking proactive and swift decisions are more likely to meet their clients’ engagements and thrive.

And it’s not just about the technological implications of the change, which will certainly be huge. It comes as no surprise that paving the way to the imminent transition will entail a holistic approach and well thought-through actions that address the whole value chain, such as:

Operations and Technology:

Adapt the technological system [through customisation or acquisition of new software] to cater for new interest rate benchmarks and market volatility.

Risk assessment:

Quantify LIBOR exposures, both financial and operational, across all systems, models, and contracts.

Valuation assessment:

Stress testing on Mark-to-Market of the existing portfolio with proposed risk- free rate.

Legal:

Define legal issues to approach matters such as the identification of impacted contracts and work towards their consolidation.

Top Management and Board of Directors:

Apprise these stakeholders and create awareness about risk exposures for assets and liabilities as well as strategic decisions to be taken.

Customer reach:

Define a client outreach and communication strategy and engage with customers about alternative reference rates.

Opportunity identification:

Banks can gain a first-mover advantage by offering new financing and treasury products tied to the new reference rates, as well as tools to manage the new risks.

Transition plan:

Develop a transition plan with clear stakeholders and accountabilities to mitigate risks.

MCB Consulting, as an international management consulting company, can help you transition smoothly in managing your exposures, leveraging seasoned deep business, process and technological expertise.
Should you want to act fast on your transition, connect with us: [email protected].

Share it