Transitioning from IBOR to RFRs
Digitising contracts referencing IBOR rates and automating transition to RFRs
04 September 2019
5 Minutes read time
In a recent chat with Lucine Tatulian, partner at management consultancy Baringa, we turned our attention to how firms are getting on with one of the most complex post-crisis transformation programmes faced by financial services - the move from Libor.
Consolidation of data from multiple sources, including manual, is one of the biggest challenges. The data tends to be in pockets, needs identifying and translating, and it also needs to be consolidated along a number of different dimensions. A significant exercise, getting a complete, accurate view of IBOR exposures is taking an enormous amount of time. Automation is important as reporting needs to be done regularly so it can be shown that exposure to IBOR is decreasing.
Getting a handle on all the contracts is one of the bigger challenges. Most contracts will have fallback clauses and the fallback mentioned will be an alternative rate should a Libor rate not be available. But most of these were not intended for permanent discontinuation of Libor and therefore the fallback mentioned will be a temporary measure e.g. if today’s Libor rate isn’t available you may fallback to previous day’s rate. In this case, where Libor rates are no longer published this effectively can move a contract from a floating to a fixed rate. So, the first challenge is to source and consolidate all of their contracts in line with their product exposures, these then need to categorised in line with fallback language type and then a remediation plan developed. This is complicated, costly and takes time. Contract digitisation and machine learning can be used to make this a more efficient undertaking.
This needs support from technology teams, to enable both systems change and new functionality as well as changes to valuation methodology. In the Front Office, it’s pricing, risk management, liquidity management; in the Middle Office, it’s valuation and risk control; in the Back Office it’s operational processing, settlements; in Finance it’s disclosure reporting, accounting; and in Compliance and Risk, it’s managing conduct and legal risk.
The UK and US regulators are more vocal about the need to transition and have made it clear that Libor will disappear. Europe is picking up pace. Firms with the more mature programmes are more transparent and are generating greater awareness of the impact both internally and with their clients, an essential step to success. So, the sooner engagement starts, the better.
Preparation for one of the most complex post-crisis transformation programmes to date takes time. Time a lot of firms won’t have if they haven’t already started working at a good pace. In June, the FCA released thematic feedback on its Dear CEO letter on Libor transition, and a lot of organisations, whether they were recipients of the letter or not, are using those themes to help structure their transition programmes to ensure it aligns with regulator expectations.
Click here to listen to the Unleash Your Data podcast episode featuring Lucine to hear more.