With less than 13 months to go until the anticipated end of LIBOR, we consider the latest market developments and discuss what steps institutions should be taking to ready themselves for migration to the new benchmarks.
Slow but steady progress
When we last discussed the transition this time last year, we of course weren’t dealing with a global pandemic. And, although the global financial services market has dealt with the impact of COVID-19 admirably, the need to deal with the economic fallout of the pandemic has unfortunately delayed the transition process.
Furthermore, while specific business loan conventions were published over the summer for the primary ARRs, we are yet to see the same level of specific conventions for business loans across all of the alternative rates. Questions abound as to if and when we can expect them, and whether additional conventions will align with those already published, quite apart from the unexpected divergences that are already emerging within the published conventions and across jurisdictions.
It’s clear that institutions and vendors alike continue to deal with significant levels of uncertainty and are going to have to work hard to put the published standards into effect within the required timelines.
Are you ready?
Now that institutions have started to examine the ARR conventions and standards in more detail, and to explore what the transition is going to mean from an operational perspective, the sheer magnitude of the change has become even more apparent: working through the new benchmarks and establishing which route(s) to choose is going to take a tremendous effort.
And, while some banks, particularly those adopting SOFR or SONIA, are leading discussions around the practicalities of a non-LIBOR future and are forging ahead with migration plans, there are others who are still waiting to see what happens, or perhaps waiting for forward looking term rates to emerge.
But we believe that it’s ‘progress, not perfection’ that will be key to a successful transition: unlike the preparations for Y2K, when institutions were preparing for an overnight switch, the 2021 post-LIBOR world is likely to involve a long evolutionary period. As the market works through the transition, we expect to see standards and conventions – and perhaps even new alternatives – continue to evolve into 2022 and beyond.
Preparation is everything
That said, it’s important to acknowledge that the conventions and standards are not mandates but merely recommendations – it’s up to the institutions themselves to determine their approach to the new benchmarks and how they will manage their operations.
Therefore, irrespective of region or which new ARR they’re planning to adopt, there is a certain amount of preparation that all market participants should be undertaking, if they haven’t done so already.
Crucially, institutions should be considering their requirements and identifying the most likely options they will be working towards. This will involve detailed analysis of loan portfolios, mapping the solutions that best suits an individual institution’s needs, and identifying any gaps. It also means establishing how much is within your institution’s control for the migration and re-pricing of loans, and how much will be subject to decisions made elsewhere.
This initial analysis should enable institutions to develop both an overall strategic plan as well as shorter term tactical steps and tasks needed to prepare for the transition. For those who fear they may have left it too late, our Fusion LIBOR transition calculator is a useful first step towards a comprehensive ARR solution.
Here to help
We have been actively working with our clients and others within the industry to establish what we need to deliver through our software to best help institutions with the transition. This has allowed us to develop a module within Fusion Loan IQ that reflects recent market discussions and the currently-known requirements.
Our software solution offers enough flexibility to incorporate new and changing conventions as and when the situation evolves, while still providing clients with a market-ready, market-validated product.
Furthermore, we expect many domestic markets to follow closely behind LIBOR, such as transitioning to the HONIA (Hong Kong) and SORA (Singapore) ARR rates and future replacements for JIBOR (South Africa). As these rates will most likely replicate the general principles and conventions set out for LIBOR, we have developed our software solution to provide the necessary support to clients, irrespective of which market they’re working with with.
Ahead of installing and deploying a chosen solution, our Global Services Team can also work with banks to help them understand how the transition is going to affect their portfolio. This includes conducting impact analyses, mapping out specific projects, and ensuring they have upgraded to the necessary version required for the solution.
To find out more about how Finastra can help you to prepare for the end of LIBOR, contact one of our LIBOR experts today.