By John Berven, Director of APAC, Solidatus

After the turmoil of 2020, many in finance would be forgiven for wishing for a quieter 2021. And yet, there is a looming deadline coming our way in the next 12 months, in the demise of LIBOR.

Financial institutions around the world remain quite unprepared to date for its impact, despite the issue being especially critical in the Asia Pacific region.

Fitch Ratings has assessed that banks and financial operators throughout the area are potentially the most exposed to the lending rate’s planned cessation, while many of these have also faced delays in their preparation due to the pandemic. Certain products in the asset management space are more likely to be impacted by the transition, such as bonds, but LIBOR’s widespread use in the sector means a widespread and rigorous check is called for.

Clearly, the next 12 months is going to accelerate calls for preparation – and yet while the issue is well documented when it comes to adopting Alternative Reference Rates, there is much less on the practicalities of just how widespread changes to business’ internal infrastructure will need to be.

The necessary amendments could easily be incredibly widespread. Just assessing how many systems within one business currently use a LIBOR rate is likely to be a time-consuming matter. Once they are identified, then the next step is looking at how those rates are used in the systems, and where these systems source those rates from, so that a widespread change to a new ARR can be organised.

Further questions abound:

  1. How do I relate all of my counterparties back to the appropriate parent company with whom to negotiate and agree re-papering?
  2. How do I find all of the trades featuring the rate as part of their hedge? Not to mention price – in complex derivatives, locating the many varied components which may be used a LIBOR rate to construct the price.
  3. How do I find all of the trades in which moving to an ARR would cause loss of grandfathering?
  4. How do I find trades where third-party consent is required before moving to an ARR? LIBOR has been around for so long and has been integrated into so many products and systems, that trying to track instances of its use within an operation could be like trying to solve a labyrinth. 

These may seem a mind-boggling number of details to consider, but the consequences of not approaching the rate changes in a systematic manner like this could be especially severe.

Impacts range from an inability to book new rates when transitioning existing contracts, to continuing to sell or buy LIBOR linked products and services inadvertently. You also risk a lack of clarity over your LIBOR-linked contracts and their payment obligations, as well as having models and business forecasts that are based on a non-existent rate. It is also impossible to understate the threat of regulatory action, or operating at a distinct competitive disadvantage – hardly what organisations need after the prolonged uncertainty of the pandemic.

To avoid these risks and be certain they are clear of LIBOR, institutions will need to scour every system, every spreadsheet and every report. With regulators taking more notice of their regulated entities, the clock is ticking, and getting louder.

However, before these impacted businesses reach out to the nearest set of business advisors and open up their wallets, they may want to consider that technology is on hand to start to address the issue from the root.

By taking the LIBOR bull by the horns as a data management problem to be solved, a management platform can provide the clarity they so desperately need.

For example, organisations can utilise visual lineage technology to enable understanding and simplification of complex systems landscapes – a simple way of counteracting the complex nature of unpicking LIBOR from hundreds and thousands of organisational touchpoints within systems.

In a nutshell, this approach creates an operational data blueprint which can track just where all of the impacted areas are within an institutional investor or bank, and set in place a practical schematic for change. The workflow for this can be easily split across a number of data experts or teams, allowing for a collaborative effort to maximise assessment of the task while factoring in version control to allow for revisions and amendments along the way.

This means that each step in the task can be documented and shared to meet regulatory, compliance or risk assessment needs. The Solidatus solution even allows businesses to model the outcomes of potential changes, so that organisations can trial how the application of alternative rates may impact the flow of information, products and services within a given system and pinpoint any potential issues – ahead of a full scale rollout with live services. This process could even identify redundancies or other data-linked inefficiencies within an organisation and save money and effort as a result.

When it comes to wrestling with the issue of locating every impacted area of the business and removing LIBOR, being able to scope the problem is a big step towards taking action to solve it and move forward. By starting with the data, it becomes easier for organisations to understand the required LIBOR replacement transformation which is called for. Some platforms also allow institutions to get a step further along, enabling them to leverage and reuse previously discovered and documented LIBOR-related data elements to accelerate the transition to ARR or other alternatives.

This means that there is no duplication of effort due to pressing deadlines – just a more efficient approach to mapping out the solutions and processes which may already exist within the business’ operations. The process also has wider value when it comes to demonstrating a wider commitment within the business for reporting, data governance and even digital transformation strategies.  

There’s no escaping the impending LIBOR deadline. But baffled organisations needn’t be daunted by the scale of the challenge.

By taking a different view of the issue, it is possible for something this complex to be simplified, and for an achievable blueprint for change to be set. It just takes a fresh perspective on the issue.

Rather than focusing on part of the problem in client contracts or jumping straight to applying alternatives, it may be simpler than expected to pinpoint just how far LIBOR has weaved itself throughout the infrastructure – and find the steps to take steps to weed it out.


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