The industry must move quickly on $IBOR change
The IBOR transition is amongst the biggest change facing capital markets and financial services in recent years. Inevitably the focus in 2021 was on completing the conversion of non-USD exposure. This required an enormous effort across almost every function in affected firms in order to ensure that the regulatory deadlines were met, and was largely successful due to this single-minded focus.
Now the USD LIBOR transition looms, and with it a far larger volume of transactions to be migrated.
Tier 1 banks are devoting very significant resources to ensuring they meet the cessation date for dollar-denominated trades, and cooperation is high throughout their functions. Despite this, the risks associated with the USD transition remain. For example, the Federal Reserve Bank of New York estimates that institutions will retain USD LIBOR exposure post-2023 to the tune of around $74 trillion, as short-dated transactions are not migrated but simply left to expire. As the NY Fed says, this huge figure underscores the absolute necessity of “finding solutions for legacy LIBOR contracts.” be that through the use of the Fallback, through a synthetic USD-LIBOR, or through bespoke means.
Libor transition – smaller firms
But what of the smaller firms? The ripples of the USD LIBOR transition are felt not only by the biggest players, but downstream to the smaller corporates and PEs. It is these organisations that face the most daunting challenges mainly because they are just not as well resourced. Many may already be outsourcing significant elements of their operations, and others simply do not have the technical, regulatory, or client outreach expertise to manage the transition in a timely manner, and will be heavily reliant on advice from their Tier 1 counterparts.
But as the cessation date is fixed, and the obligation is non-negotiable, the risks associated with non-compliance are extremely significant, especially as some of the solutions noted above have not been confirmed.
So how are these smaller players coping with this important capital markets change? Some of the market participants we have spoken to for this series have underscored the severity of the problems facing organisations that do not have the in-house capacity to manage the transition. Concern regarding the lack of communication between regulators and downstream firms has been a common refrain; in particular, many are worried that these firms have not been given sufficient detail on what is expected of them.
There was a sense amongst the wider universe of organisations that the bulk of the work was already completed when non-USD transactions were migrated. However, while the groundwork has certainly been laid, there is now a realisation that the USD transition remains a very significant task regardless of non-USD successes. The models required to carry out the re-papering require augmentation, the volume of trades is of course far higher in most cases, and the client outreach is likely to be more arduous simply by dint of the additional volumes and ‘new’ complexity.
As such, beyond the Tier 1 banks, most market participants have no choice but to seek outside support. Luckily for those firms there is a healthy and well-developed industry dedicated to addressing change management within financial services, and many with extensive experience of previous, and future, IBOR transitions.
The burden of the $IBOR transition may not fall evenly. But the deadline must be met, regardless of the size of the firm in question. In order to achieve a timely migration for USD trades, most firms must seek outside support.