Fraud and conspiracy scandals surrounding IBOR manipulations go
Similarly, on July 12, the U.S. Securities and Exchange Commission (SEC)
LIBOR (and its equivalent global indexes) have been the reference rate for the financial industry for more than 40 years — $350 trillion in financial products are LIBOR-indexed. The transition to alternative risk-free rates will come with a vast number of challenges for financial institutions that must comply with several deadlines determined by the regulators.
In terms of the new risk-free rates, it has been reported that by the fourth quarter of 2019, the daily publication for the Euro short-term rate (€STR) is expected, as is the transition to €STR from the Euro OverNight Index Average (EONIA), which is the one-day interbank interest rate for the Euro zone. €STR is an interbank interest rate calculated by the European Central Bank on the basis of unsecured loans contracted overnight between financial institutions. By the third quarter, the Sterling Overnight Index Average (SONIA) transition will begin, and fallback plans will be implemented, according to reports. SONIA is based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.
In the first half of 2020, the Federal Reserve Bank of New York will
Expect cross-functional disruption
IBOR transition represents a major cross-functional undertaking for all global financial institutions. It is important for financial markets participants not to delay the completion of an IBOR transition impact assessment for their front-to-back value chain. DXC Technology has compiled a high-level view of IBOR impacts across organizations, as shown in Figure 1.
Figure 1. IBOR impacts across functions, with 1 being lowest impact and 4 being highest impact
3 key steps to successful transition
Considering all the impact areas and following our analysis of this transition in a specific market context, contract remediation appears to be one of the biggest challenges. Due to the huge volume of documents (many of which are not in digital/machine-readable format) residing in various heterogeneous contract storage systems, contract reviews will represent not only significant operational workloads, but technological challenges as well.
To ensure an efficient transition, financial institutions must make the remediation process efficient, flexible and compliant with local laws. Above all, they must ensure that the process isn’t disruptive to customers. The remediation process can be managed using a combination of business process changes and resource augmentation, and the smartest players will partner with leading technology firms to leverage digital accelerator technologies such as optical character recognition (OCR), robotic process automation (RPA) and artificial intelligence (AI) to speed this process.
A strong change/program management function is paramount. It must consist of a multidisciplinary team to manage the transition from a business, operational, legal and IT perspective. This team should understand how the transition will affect the organization’s operating model. In addition, the development of an independent risk-monitoring framework can strengthen the overall program structure.
Far-reaching change such as this requires a robust end-to-end testing strategy. From market data acquisition to pricing, margin call and risk-monitoring processes, a test factory or center of excellence can ensure that all changes made across an institution’s systems and processes are validated and verified prior to go-live. The testing process will have to be standardized, automated where relevant and fully documented for regulatory audit purposes. The testing factory setup would mix business and function capabilities.
Getting ready for IBOR transition
The European Central Bank’s letter petitioned banks for the following information:
- A board-approved summary of each institution's assessment of key risks relating to benchmark reform and a detailed plan to:
- Mitigate such risks
- Address pricing issues
- Implement process changes
- Mitigate such risks
- Contact points at the management level to oversee the implementation of these plans
Significant institutions were asked to submit this by July 31, 2019.
Despite the numerous uncertainties relating to IBOR transition, institutions should mobilize quickly to minimize the risks of not meeting the regulatory deadlines in time or staying aligned with their peers. The deadline may be 2 years out, but the time to start transitions is now.
DXC has an end-to-end Interbank DXC Technology has an end-to-end IBOR transition offering that includes consulting, analytics and information governance, application services, platform implementation, contract remediation and testing services. We leverage digital tooling such as automation and AI to accelerate delivery of your transition programs. Contact us to see how DXC can help you make a successful transition.
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