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02 May 2019

Baringa (L)IBOR Roundtable for Banks

Bruce Laing

Bruce Laing
Partner | Financial services | London

Lucine Tatulian

Lucine Tatulian
Partner | Financial services | London

Baringa hosted our London IBOR Round Table event on 1st May 2019 with Xceptor. The event was a hugely successful idea-generating event. This article summarises the key takeaways and further details behind each.

5 key takeaways:

  1. Scenario planning - the spectrum of potential outcomes post 2021 will require programmes to account for varying scenarios considering liquidity in the market, availability of term structures, market acceptance of fallback language and the timing of the discontinuation of IBORs
  2. Project prioritisation - although the nature of the work will likely change over time as the scenarios develop, firms must develop a prioritisation strategy although there is some no regrets work that can take place now – participants at the event had different weightings given to each area – conduct driven, size of exposure by product, complexity of IT system changes and number of legacy contracts
  3. Conduct – significant concerns amongst firms about the conduct / legal / regulatory risk surrounding the transition with a significant link into the theme of vulnerable customers and risk of mis-selling. The need for a regulatory ‘safe harbour’ was discussed to provide market and customer protection to support the transition
  4. Liquidity – lack of liquidity in alternative rates are holding back the transition, leaving a key question about what will trigger the liquidity and behavioural move into ARRs – large corporates, banks, regulatory bodies and/or central banks
  5. Technology – likely to play a large, multi-faceted role in the transition with the need to consider analytics/AI/machine learning where appropriate – participants had views on a number of tools but with mixed reaction to their viability

Further detail on each area:

As the standard benchmark for decades, the transition away from IBORs are expected to have deep impacts on products and processes.

1. Scenario planning

  • Given the many unknowns and differing transition timelines, a scenario based approach to IBOR Transition seems standard amongst the room, though there were variations on those scenarios:
    • Worst case scenario
    • Threefold scenario: worst, mid, best
  • Comparisons to Brexit? Not only on a scenario based approach but also skillset and knowledge of resources
  • Identify and execute the ‘no regrets’ work, irrespective of scenario. It sets the foundation and direction, from which you can adjust as assumptions / market decisions evolve
  • Firms must monitor industry transition, particularly potential “trigger” events - such as the use of ARR rates in discounting at clearing houses

2. Project prioritisation

  • A governance and programme team should have already been set up to execute and monitor transition activities
  • Although the nature of work will likely change over time, areas should be prioritised to ensure an efficient transition
  • Differing views on weighting given to each area -
    • 1) prioritisation based on the vulnerability of clients, 2) examining fallback language, 3) size of underlying exposure
    • 1) impact assessment, 2) begin to implement on the required operational and technology changes, 3) client outreach and start to transition the portfolio

3. Mitigating conduct risk

  • Conduct is a key consideration – not only for the impact on clients but also throughout the decision making process of the project
  • As firms look at a risk based approach, conduct / legal / regulatory risk is very highly weighted
  • Risk of mis-selling, particularly in the more litigious jurisdictions (e.g. US), needs to be properly considered in the risk based approach
  • Significant link into the theme of ‘vulnerable customer’
  • Request to create a ‘safe harbour’ to provide market and customer protection / transition

4. What will trigger a shift in liquidity?

  • Key question around what will trigger the liquidity shift and the behavioural move onto ARRs
  • Liquidity will be key and therefore we expect different liquidity shifts by region given the different nature of the rates
  • Not only liquidity but historical info will need to be gathered (e.g. modelling purposes, FTRB impacts)
  • Big corporates will look to make a move and seek counterparts to do this with, causing a shift in liquidity / taking a stance
  • Given the systemically important nature of the transition, which affects consumers as well as financial institutions (e.g. increase in home repossession on higher mortgage rates), governments and regulatory bodies may step in to ensure Banks start increasing trading activity

5. The importance of technology

  • Effective deployment of technology will be crucial in easing immediate priorities
  • Particular areas where technology can be beneficial are:
    • Understanding the document population
    • Operational and technology changes
    • Automating reporting, where possible, to track progress and identify issues
    • Automatically identifying IBOR exposure through document analysis