By Sandeep Bhorkar, Director, IBOR Transition, Société Générale
Disclaimer: All of the views, opinions and interpretations presented herein are solely those of the speaker and should not in any way be considered to represent those of Société Générale.
What, for you, are the benefits of attending a conference like the ‘IBOR Europe Forum’ and what have attendees learnt from your session?
IBORs are at the heart of the modern financial system. The current transition is no less than an “open heart surgery” of the financial system. No one has faced this challenge and professionals are struggling to make their way through it. The conference provides a good opportunity to understand how experts and peers in the industry have been approaching the topic till now. A lot of added value will also come from sharing views about the impending challenges in this multi-year transition. Attendees learnt more about the challenges, approaches to face them and possible solutions on the systems front during the panel discussion “systems & set-up”.
How can risk professionals begin to develop internal transition plans and systems to ensure they are operationally ready?
Transition risk is faced by all the units of the bank. While the individual units need to develop internal transition plans, it is necessary that they are coordinated by a central governance. A full review of processes and tools to identify the usage of IBOR is the first step in the process. This will provide a list of high-risk areas where processes and systems will have to be modified to get the organisation operationally ready.
What areas of IBOR Transition are unclear and can have major impact on systems?
The current term IBORs are “forward looking”. As a result, floating rate interest amounts are known at the beginning of the period. All the financial instruments are built on this “forward looking” convention. At this stage, there is a lack of clarity on whether the new term rates will be “forward looking” or “backward looking”. The “backward looking” term rates will imply a major change for system implementation. This is one of the areas that has potential to impact IT systems and setups.
What are the challenges in adapting legacy systems?
Legacy systems were built to reflect business conventions. As the business conventions change, legacy systems will need to be modified to reflect this. The IBORs are deeply rooted in the systems and it poses a significant challenge to cut open all the exterior layers and make the necessary change. Making sure the exterior layers are stitched properly and the system behaves as intended poses a further challenge.
In my experience, “internal conventions” and “hard-coding” are the two key challenges in adapting legacy systems. The systems were built around IBORs without any choice or fall-back option, thus making them “hard-coded”. The shortcuts implemented over time form the “internal conventions” in the system that will have to change too and will need significant regression testing efforts.
What advice would you give to industry professionals when budgeting for transition?
Not under-estimating the transition. Industry has never faced this kind of change before and there are some surprises still waiting to be discovered. While we plan and prepare to execute this complex transition, one must be prepared to react to those surprises and provide for adequate contingency.
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