Other parts of this series:
In the first blog in this series, we discussed the upcoming 2021 deadline proposed by the Financial Conduct Authority (FCA) to transition from the London Interbank Offered Rate (LIBOR), which currently underpins around $400 trillion in financial contracts for derivatives, bonds, mortgages, commercial and retail loans.
To gauge the financial services industry’s preparedness for the upcoming LIBOR transition, we conducted the Accenture 2019 LIBOR Survey, interviewing 177 financial services and corporate industry executives. We found mixed levels of preparedness and a degree of overconfidence among respondents.
We found, for example, that:
- LIBOR-exposed firms are challenged in assessing their risk exposure and the effectiveness of controls given the expected transition journey. They are also challenged in how to measure and quantify risk and in how to enhance and update product offerings within current risk tolerance levels to capture more value from their business and risk management programs.
- Another challenge is aligning the proper level of preparedness across different business lines and products while balancing uncertainties, resource capabilities and transition risks such as operational, technological, and reputational risks.
- This optimism extends to the belief—held by nearly a quarter of survey respondents—that the 2021 transition deadline may be pushed back. This overconfidence, which exposes financial firms to increased risk, can result in real financial consequences and missed opportunities.
There are other areas of concern among the survey findings, including the legal department’s readiness and capabilities and those of the risk management function. Only 15% of respondents indicate their legal teams are ready to deal with the numerous contract remediation, deal restructuring and repapering activities at the scale required for their legacy contract backbook and to support the issuance of new risk-free rate referencing products.
In addition, only 14% of respondents claim that their risk management teams have a detailed understanding and plan of the transition activities and the impact of those plans on risk management for the current book, as well as for any renewals and/or rollovers and new originations. This implies that respondents lack clarity on how much spend and effort is required to undertake the transition.
In our interpretation of the survey results, we see that firms’ plans are not as complete as they should be, especially among financial services firms outside the investment banking space. These firms lack consistency and commitment in stakeholder engagement across their enterprise.
Another issue: Planned spending over the next three years in critical areas such as technology (14%), operations (17%), and client outreach (8%), the transition across the industry lacks momentum, and that the estimated $155 billion in technology and business spend is probably an underestimation.
In the next blog in this series, we will look at some of the reasons for financial services firms’ hesitation about preparing for the LIBOR transition, including a (possibly unjustified) belief that regulators will delay implementation.
For further reading, download the full survey report.