Julian Eyre | published on 1st October 2018

IBOR replacement (end-2021) why firms need to act NOW

Jonathan Adams writes – The impact of the replacement of Interbank Offer Rates or IBORs is far reaching both geographically and by the sheer volume and diversity of products that use them as benchmarks (estimated 300 trillion USD equivalent).  Moreover, the operational impact to the banks, asset managers, insurers and their respective clients that issue, sell and manage IBOR benchmarked products will be significant.

Yet, whilst this has been on firms’ radars since mid-2014 (the Financial Stability Board issued a directive in July 2014) not all firms have been able to assign the priority it now needs to ensure a market-wide transition by the 2021 deadline.

The LIBOR rigging scandal of the mid-2000s triggered wholesale benchmark reform, initially with the Financial Conduct Authority’s (“FCA”) removal of LIBORs supervision by the British Bankers Association (“BBA”), appointing ICE Benchmark Administration (“IBA”) as interim, with the longer-term goal of replacing IBORs with new Risk Free Rates (RFRs) for use as benchmarks

Of the US$300 trillion of product using IBORs as reference rates, the market estimates 18% are products that mature after end-2021. Firms therefore need to assess the risks and impacts to these products and formulate a strategy to remediate.

Firms face the following challenges:

• Business
  • Contractual – fall-back clauses in financial products that reference IBORs typically only cater for situations where the IBOR is not available for a short period of time
  • Delta between old IBOR and new RFR
  • No term rates
• Operational / Technology
  • Repapering
  • Processing the contractual changes and client engagement
• Regulatory
  • European Central Bank – Benchmark Regulation (“BMR”) and the phasing in of the Euro Short-Term Rate (“ESTER”)
  • Direction from the FCA/PRA in the UK, the FED and the ACCR in US and direction and associated working groups from the Swiss and Japanese central banks

The pressure is now on

Although IBOR reform has been in flight for two years, other regulatory compliance pressures have taken priority, therefore  the progress among firms programmes is mixed.  Clearly this is a concern at the supervisory level, so much so, that in the UK, the BoE PRA and the FCA have jointly written to large banks and insurance companies seeking assurance that the senior management and boards understand the associated risks and have transition planning underway; board approved responses are required by 14^th December.  Similarly, the other jurisdictional authorities have set a supervisory agendas for their RFR transitions.

Not all firms based in the UK will be required to respond to the FCA and PRA but all firms need to get their planning underway by organising their agendas and will have to draft a roadmap. In the short term, the focus will to be on change programme mobilisation and impact assessments, followed by a transition programme roll-out.

At The Field Effect, in collaboration with Delta Capita, we specialise in financial market change and transformation, Target Operating Model design and can help you identify how process, function, data, technology, people, revenue, and controls work together in order to deal with the challenges ahead and accelerate the delivery of change. Get in touch to discuss further on info@thefieldeffect.co.uk or info@deltacapita.com