Why IBOR Transition Matters

The London Interbank Offered Rate (LIBOR) serves as the benchmark reference rate for a wide range of wholesale and retail financial products. Although estimates vary, it is generally accepted that financial products with a notional value in excess of US$350 trillion globally, are currently tied to IBOR rates (including EURIBOR and TIBOR).

The sheer multiplicity of IBOR-referencing products, stretching from OTC derivatives through syndicated loan portfolios to retail mortgages and automotive loans, means that most financial services (FS) organizations will be faced with complex and far reaching technology–change requirements over an extended period of IBOR transition.

In this blog, I look at the main areas of IBOR transition impact across FS technology estates and consider some of the key system changes that IT change teams will need to frame and deliver to support the successful adoption of alternative reference rates (ARRs).

System Impact Analysis

IBOR transition will eventually touch almost every aspect of front-to-back, FS-technology system flows. However, despite almost overwhelming change implications, there are five key areas where the system and architecture impact will be greatest:

  1. Data Management The inception of new ARRs creates a series of challenges for data sourcing and validation, including market-data feeds, broker screens and vendor data for new products, as well as datasets to support complex multicurve construction.
  2. Primary Trading SystemsVaried configuration changes and retooling requirements for platforms (both in-house-built and vendor products) used to price, capture and execute trades on ARR-referencing products.
  3. Risk Management Wide-ranging system changes will be required to reflect changes in product valuation and risk management models. In addition, historical datasets for key risk–model conventions will need to be accrued and added to libraries over time.
  4. Post-Trade Processing Back-office platforms will need to support the booking, processing and valuation of ARR-referencing products, as well as accommodate the bulk novation of contracts and trade documentation that reference legacy IBOR products.
  5. Treasury and Asset Liability (ALM) Management Systems Adaption of treasury management and supporting platforms to accommodate ARR-referencing products, enabling key ALM processes including balance sheet funding, hedge accounting and cash-flow forecasting.

Focus Area: Front-Office Reconfiguration

Technology teams that support sales and trading platforms are bracing themselves for broad, portfolio system reconfiguration and retooling requirements.

The central role that primary trading systems (PTS) now play in the management of front-to-back trade flows for IBOR-referencing products means that these transition requirements will extend beyond just pricing and deal capture functionality.

The breadth of potential IBOR transition requirements in the front-office domain is summarized in the following diagram:

In addition to framing and prioritizing portfolios of system reconfiguration and retooling changes, I anticipate that front-office change teams are likely to be involved in the following activities:

  • Constructing accurate  inventories of impacted trade populations across products, trading desks, lines of business and geographies
  • Defining conversion approaches across products and asset classes – complex products (e.g., swaptions) will be managed as exceptions to vanilla conversion approaches
  • Unwinding or terminating and potentially rebooking open trades that reference legacy benchmark rates
  • Negotiating (potentially with third-party arbitration) new ARR-referenced spreads for rebooked deals
  • Creating new products that reference new benchmark rates across currencies

Starting the Libor Transition Journey

Investment banks with rates and fixed-income trading businesses will be most obviously impacted by IBOR transition, but the impact will extend to any FS organization that uses IBOR-referenced benchmarks to value its product portfolios.

Despite their size, larger FS organizations with more mature change-delivery capabilities are best placed to meet IBOR transition. Many smaller FS organizations, perhaps lacking experience of complex program delivery, will feel the burden of IBOR transition more acutely.

However, despite these challenges there are practical steps that multidisciplinary change teams can take, now, to prepare their organizations for the impending Libor transition journey. They can:

  • “Scan” businesses to assess likely transition challenges and key impacts across front-to-back processes and system flows
  • Determine how to amend legacy contracts to reflect ARRs, including hedge accounting treatment
  • Create inventories of legacy benchmark usage across products and calibrate exposures linked to legacy benchmark products
  • Ensure robust, written contingency plans are in place in case a legacy IBOR rate materially changes or ceases
  • Develop a phased transition playbook so that a transition program can be mobilized and executed efficiently

Launching a coordinated approach to Libor transition planning and analysis now will enable FS firms to take the initiative on this complex and multidimensional marketplace challenge.

Chris Beer
Chris Beer is a senior change-management professional with 25 years’ financial services experience. Extremely well-versed in business transformation, Mr Beer has a deep understanding of a wide range of financial services businesses, including capital markets and investment banking, global custody, securities services, wealth management and retail banking. Chris has in-depth knowledge of managing initiatives driven by regulatory requirements, revenue growth, cost reduction, capacity and scalability, legal entity restructuring and organizational redesign.