Baringa recently hosted the fourth in its series of (L)IBOR transition roundtables, and uncovered the common issues being faced by asset and investment managers.
Last week we held the fourth event in our ongoing (L)IBOR Transition Roundtable series. This session focused on the implications of the transition for asset and investment managers. We had a variety of firms represented and the discussion generated a number of common themes which we have outlined below. If you’d like to join us at future events, please contact us at IBORTransition@baringa.com.
Chicken and egg
It was great to have our buy-side clients all in one place and they expressed a common expectation of more from the sell side. Asset managers would like to see more alternative reference rate (ARR) products from their banks. Asset managers are still seeing large numbers of new IBOR-linked products, and where ARR products do exist there is a lack of comparability to make informed decisions. A previous Baringa IBOR event for the sell-side highlighted the banks want to be led by their clients’ demand, so we are in a bit of a chicken-and-egg scenario.
The buy-side needs sufficient liquidity, and there won't be a critical mass of liquidity until the buy-side moves. There was an expectation that this would increase significantly in the second half of 2020, linked to the ISDA protocol and alignment of the discounting change. There is a commonly held view that global regulators will become frustrated with the slow pace of progress, and will likely become more prescriptive, or more punitive. Participants believe that key focus areas for these regulator will be tracking risk exposures and treating customers fairly (TCF) to mitigate conduct and litigation risk.
To be or not to be... regulated
There was some great discussion in the room on whether or not the IBOR transition needs to be formally regulated by the appropriate authorities to get the attention needed to meet the end of 2021 deadline. This was quickly followed up with lively debate on whether the end of 2021 is a real deadline, or whether there will be a “MIFID-like” extension of a year and a further bedding-in period before the regulator acts? People are working to different assumptions, and there was a sense that, even with more clarity in the near term, some scepticism remained. In the absence of clarity, we encourage firms to develop and plan to a number of scenarios, akin to Brexit.
Other discussion points
Unsurprisingly, firms are approaching the transition slightly differently depending on the scope of services they offer to their clients and the mix of retail and institutional customers. Firms have appointed a range of different sponsors for their programmes from CFO, CRO and Treasurer although very few programmes are led out of the frontline business. Our clients are focused on building the ability to process ARR-linked products with deliveries planned from Q1 2020 onwards. They are also working closely with their third-party administrators, vendors and data providers to manage dependencies with a common view being that this involves long lead times. Customer communications have been limited, as firms determine what to communicate based on their client mix and the complexity of their value chains.. Firms may be able to leverage the customer outreach approach developed for MIFID and Brexit, as many parallels exist with the LIBOR transition.
To sum up
The key words of the night were proportionality and relevance. It is crucial that people respond proportionally and understand impacts to their firm. The recent request from the FCA to ~200 investment and asset managers for updates on their LIBOR programmes will also increase the focus from these firms in 2020. If you believe there is no or limited impact for your firm, you may need to have another look and lift every stone to be sure you’re not surprised in the run up to the deadline.
Do you need help developing ARR related products or managing the business processes around this change? Baringa can help. Contact us on IBORTransition@baringa.com to learn how we can help you.