The IBOR Transition: Challenges and the Road Ahead

Operational readiness is specific to each institution and has to be complemented by technological and regulatory developments and fine-tuned to the ongoing changes in market infrastructure.

Interbank Offered Rates (IBORs) play a pivotal role in the functioning of financial markets. The transition away from IBOR represents one of the biggest challenges facing financial services firms. The reform has been ongoing for more than two years, during which market-infrastructure providers, regulators, buy- and sell-side firms and trade associations have merged their efforts in steering some of the most complex transformation programmes the financial industry has undertaken.

The benchmark interest rate underpins more than 400 trillion USD of outstanding contracts, with maturities ranging from overnight to 30-plus years, including derivatives, loans and bonds. Given the scope of the impact on the real economy and financial markets, planning for the transition needs to be well underway.

This paper explores the development of the IBOR reform. The first part details the status quo, some of the various aspects and challenges involved and outlines the effects of migrating from IBORs to risk-free rates (RFRs). The second part of the paper outlines the preparations firms need to make to accommodate a smooth transition.

With less than 18 months to go until the expected LIBOR cessation, the road ahead remains challenging and unknown. One of the biggest concerns for the industry once LIBOR is discontinued is the potential loss of value pegged to the old benchmarks. While it is difficult to quantify the magnitude of such impact at an institutional level, let alone the industry as a whole, there are a number of considerations worth taking into account.

The LIBOR reform presents many challenges, including technological issues. Of the considerable efforts required, technology and infrastructure challenges will constitute the bulk of the effort for most firms. A large part of a firm’s overall technology spend will be upgrading, replacing, or re-architecting existing systems that support today’s rate regime and in a future state post-LIBOR. Operational readiness can be ensured by leveraging third-party technology and infrastructure providers that have the capacity to support the transition process.

  • The problem with LIBOR
  • The status quo of the reform
  • Risks and challenges of the LIBOR reform
    • Rethinking product economics
    • Challenges to valuation
    • Challenges in constructing new curves
    • Challenges in pricing FRNs and loans with new curves
    • Challenges for IT infrastructure
    • Challenges for liquidity
    • Challenges created by COVID-19
  • The Road Ahead

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Navigating the IBOR Transition

The IBOR reform represents one of the biggest challenges facing financial services firms. Successful management will require significant change and strategic risk management. Preparing for the transition will require firms to establish a strategy to assess the impact and navigate transition risks. Is your firm ready?

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