The London Interbank Offered Rate (LIBOR), first introduced by the British Bankers Association in 1986 and usually referred to as LIBOR or LIBO, is the most widely referenced rate in international finance. The Financial Conduct Authority (FCA), an independent self-regulatory body, oversees LIBOR, and will no longer compel banks to submit quotes for LIBOR after 2021. With the cessation of LIBOR, Financial Services providers face a major change initiative. This isn’t merely a rate change but a potential change to how they run their business, from the product mix to the platforms they use, their approach to data management and the market role they set out to play.
The LIBOR reform presents numerous challenges, among them a technology challenge. The impact of this change across an organization’s technology environment should vary in size and scope. The 2019 Accenture LIBOR Survey found planned investment in technology correlates to the size of the firm.1 The larger the firm, the more it planned to invest. Product design, risk models and operations were the areas to receive the largest share of investment among survey respondents, followed by technology.
As a technology leader within your organization, it’s important to fully evaluate and assess your impacted environments. Where do you see the greatest risk to your platforms and systems following the LIBOR reform?
When we probed LIBOR survey respondents on their transition priorities, they indicated their primary focus was on preparing and assessing the impact of the change (to be completed in 2019).2 Many institutions focused on the business model and their ability to better assess risk and understand how their front book would be affected by the transition. A more recent focus on technology emerged among respondents, mostly driven by the timing of the required upgrades and the need for a multiple platform upgrade strategy that requires testing as well as a timely plan to implement the upgrades. According to the Accenture LIBOR study, capital markets, banking and insurance respondents plan to spend over $100 million on their LIBOR transition.3
Adding to the pressure, the Alternate Reference Rate Committee (ARRC), a working group formed by the NY Federal Reserve, issued a request for information to the vendor committee to solicit input on timing of the upgrades and an understanding of the impact functionality.4 The good news: The tech vendor community continues to work on required system changes as well as an overall outreach approach to assist banks, asset managers, insurance companies, investment advisors and others in preparing and effectively integrating the new rate structure into their environment. We have also observed many of the major market making banks actively beginning their technology conversion, in large part due to LIBOR cessation and their inability to create LIBOR-based products moving forward. Some banks have migrated to a new loan servicing platform to take advantage of opportunities presented by the new risk-free rates and the corresponding compounding and arrears methodology currently proposed by the ARRC working group and the Loan Syndications and Trading Association.
“… close to $400 trillion in loans, securities and derivatives affected.”5
What this means to a financial firm
Following a long period of analysis and review, we have seen many organizations implement program management offices and governance to understand and manage the change. As a technology leader within your organization, it’s important to fully evaluate and assess your impacted environments. Where do you see the greatest risk to your platforms and systems following the LIBOR reform?
Another important element concerns transition teams’ overall skill level and knowledge. The LIBOR transition requires enhanced capabilities in new platforms and models, as well as new enterprise-wide initiatives that require knowledge and skills in emerging technology like artificial intelligence, machine learning and data science. Part of the planning requires fresh thinking and a new model around the talent required to deliver the transition solution, the “upskilling” of talent and how to expand the team’s overall knowledge base and skillsets. For institutions the task ahead is challenging and complex, requiring solid understanding of powerful smart technologies, something many organizations are just beginning to acquire.
Technology impact assessment
Many financial institutions are beginning to understand the end-to-end impacts to their platforms and systems brought upon by the LIBOR transition. Now is the time for them to fully evaluate their technology environment, scope out the impacted areas and assess areas that are at greatest risk, then identify opportunities to migrate to new platforms or systems. In early 2019 we observed many global financial institutions making a strategic shift to new platforms to take advantage of LIBOR’s cessation. These institutions are leveraging this transformation to reimagine their business and product offering. For those who are beginning their assessment process, it’s important to understand your front book and back book product mix.
Data management assessment
In-depth understanding of an institution’s current data lake or warehouse and the various pods that support the enterprise-wide data management process is critical. Many institutions have data initiatives and databases to support various source systems across the lines of business for trade level data, contract and financial data. Contract remediation is expected to be a key area of focus when completing an institution’s data assessment. In some cases, this activity is less of a focus and should move to the front line of data assessment for the technology leadership. For many institutions, contract repositories are grouped by product line and/or business area. Part of strong governance around the LIBOR program involves a complete understanding of the document families so counterparty and deal type are included in the scope of work.
Test often across the environment
There is opportunity to run scenarios on the range of proposed rates as well as the calculation methodologies. It’s important to evaluate the health of the technology infrastructure and its ability to receive and process the new rates and calculations. In many cases, financial institutions are deciding to migrate from in-house and legacy platforms to allow the changes to the rate. This becomes an opportunity to assess the viability of an institution’s entire ecosystem. Is it the right time to make a change?
The phase out of LIBOR also presents business opportunities. The new calculations, as well as the way in which the risk-free rates are calculated, changes pricing across a wide range of products. It’s an opportunity to reframe the systems, platforms and tools used across multiple business lines. It’s important to redefine an institution’s requirements, the product mix and the roadmap to align with the change.
The conversion to LIBOR is a multi-faceted and nuanced migration requiring expertise that reaches far beyond the front or back book of a bank. It is among the most comprehensive and inclusive of these types of changes to come into effect and offers an opportunity to truly undergo a transformation. As financial services institutions are driving towards a digitally based model—one that encompasses a complex ecosystem of new technology—new skills, a comprehensive regulatory understanding and a multi-faceted upgrade strategy that requires all assets to deliver against the objective is critical to an effective LIBOR transition.
- “Accenture 2019 LIBOR Survey,” September 2019. Access at: https://www.accenture.com/us-en/insights/financial-services/libor-transition-survey.
- “ARRC Releases Vendor Survey and Buy-Side Checklist on Transition to SOFR,” Alternative Reference Rates Committee, January 31, 2020. Access at: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/Vendor_Survey_and_Checklist_Press_Release.pdf.
- “How to Update $400 Trillion in Contracts for LIBOR Transition,” Risklibrarynet, March 10, 2020. Access at: https://www.risklibrary.net/derivatives/how-update-400-trillion-contracts-libor-transition-30076.
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