Assessing the impacts and consequences of LIBOR transition including timelines, reference rates and the path forward

Assessing the impacts and consequences of LIBOR transition including timelines, reference rates and the path forward

By Shannon Harris, Senior Research Executive, CeFPro 

The phase out of LIBOR is set to largely impact multiple financial institutions, with progress so far proving challenging and raising many questions as to the best way forward. With a majority of firms preparing to tackle the enormous task, many are taking the very early steps of moving to alternative rates. However a sufficient amount of pre-planning, infrastructure set up and re-documentation will be required to meet the deadline and be operational ahead of 2021. With the impending transition looming several questions remain unanswered and the consequence of the conversion is unknown.

Ahead of The Center for Financial Professionals upcoming IBOR Congress taking place on October 4 in NYC we have conducted an extensive research study into LIBOR transition. The research aimed to identify the top challenges faced by industry professionals who are directly and indirectly involved in the process. Below are the top three challenges produced from our research;

SOFR

Several of the questions raised by industry professionals related to the adoption of new rates with particular emphasis on SOFR. There are several options to consider when moving onto new rates, however it appears that in the US SOFR is the rate of choice for the transition. Although this raises several questions and the full impacts of moving onto SOFR are currently unknown. Below are just some of the comments we received;

“I want to know if there are other indices to consider apart from SOFR? It seems that’s the main one but it’s always helpful to explore other options”

“It would be helpful to know the timelines of when most banks will switch to SOFR. What are people’s plans for adoption? what is the timeline for products to transition to SOFR?”

“There are so many uncertainties of switching to a new rate, people want to know what does SOFR look like in practice, what’s the pace of trades and the pressure and how legal documentation is being drafted to account for SOFR?”

“So you have every system piped with LIBOR, but you need to show the system is capable of re-plugging into different rates. But every system has to be changed and made sure it can transition over”

Impact on clients

Another key challenge was the potential impact on customers and clients. Undoubtedly the removal of LIBOR will lead to several changes including adjustments to systems, contracts and documentation. A leading query was the ability to successfully change the business to accommodate transition whilst also limiting the impacts on customers. Again, the full consequences of the phase out will not be known until after the transition, however, firms can actively plan now to ensure their clients/customers don’t experience negative repercussions. Below are a few of the top points noted in our study;

“There are trillions of dollars of consumer loans that are indexed to LIBOR, but this needs to change. So how is that done? There is a risk of lawsuits in the industry if it’s not done properly, somebody may feel aggrieved that whatever the replacement index is doesn’t suit them”

“Of course the moving to new rates will need re-documentation, but a big worry is the impact on customers. How can you make sure the process goes ahead smoothly and doesn’t cause angry customers?”

“The changes will definitely impact clients from an administration standpoint because if they have existing legal documentation referring LIBOR that will need to be changed. But if done properly it shouldn’t cause too much disruption”

Industry impacts

Finally, one of the biggest areas of concern was related to the impacts of LIBOR transition on the wider industry and individual business. Several interviewees suggested that the implications of transition would be wide spreading and have the potential to influence different areas of the business, operations and market conditions. For example, there seems to be a lack of understanding on how using alternative rates will affect areas such as liquidity, funds transfer pricing and FX markets. Just some of the leading comments have been outlined below;

“LIBOR is going away and banks are starting to adopt SOFR, that will impact FTP and liquidity. But certainly most firms will be getting ready to price off SOFR both in loans and deposits, so the liquidity teams are coming up to speed on this index”

“There is uncertainty with LIBOR going away because there are trillion of dollars of facilities tied to it, and what does it do to the balance sheet and derivative market and FX market, there are countless questions”

“It will affect a lot of things like legal documentation and different indexes and will impact FTP. This is likely to have a large liquidity impact because the liquidity premium will come from this”

“Right now there is not much known about the behaviour of LIBOR compared to alternative rates and where the market will be trading. Like how the market will compare with trading contracts with alternative rates?”

The results of our study allowed us to gain insight from those leading the LIBOR transition. Arguably one of the main themes raised throughout multiple discussions was the threat of uncertainty. With so many unanswered questions around the transition including the implications for clients and the wider business many firms are understandably concerned about the task ahead. In light of these concerns several working groups and committees have been formed to allow for industry discussion and thought sharing. Encouraging these interactions will allow for guidance on the process and potentially even shape regulatory thinking.

To encourage these discussions further The Center for Financial Professionals will be hosting a practitioner led IBOR Congress taking place on October 4 in NYC. The intensive and interactive 1-day forum will feature some the leading industry experts from US and domestic financial institutions to share their experiences. Throughout the event several presentations and panel discussions will allow for in-depth analysis into IBOR including timelines, consequences and the path forward. To find out more and view the full agenda and speaker line up please visit our website at – www.cefpro.com/ibor

For any further questions please feel free to get in touch at shannon.harris@cefpro.com

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