LIBOR Transition - Hidden challenges
On the topic of #LIBOR transition conversations with sell-side clients, has intrigued me. For some #LIBOR transitioning is a big deal and for many, budgets are being debated as I type. On the other hand buy-side, insurance companies, corporates, in typical style, have been slow on the uptake. Each market participant needs to realise, comprehend and act on this now as the December 2021 date applies to everyone.
The operating model deployed by clients is also very unique. The ones who were at the core of the issue have dedicated Front Office Managing Directors leading the change, at others a dedicated CRO has been given the mandate, and at most others, the responsibility is with the Change function.
So where does the responsibility lay? As explained in our paper, the impacts of Libor transition are all prevailing. The impact is going to be felt right at the top. #Valuations are the obvious place to start since the rates change, the discounting and forward curves change, valuation methods change, and the term structure of interest rates changes. #RWA is the next obvious impact area. The impact here is doing to be multi-fold with direct impact from the change in valuations but even more significant will be the impact from #operationalrisk. Operational risk arising from processes, systems, data, legal etc. processes change. The operational issue is to be looked at in great detail here. Organisations have LIBOR embedded in different types of transactions - Corporate and retail #lending, #mortgages, #swaps, #bonds, short-term #loans, #structredproducts, other #derivatives etc. The operational risk that will arise from the processed designed to discover all functions, systems and processes impacted by LIBOR is significant and hence the risk of these processes failing to do the diagnostic needs to be recognised and accounted for in RWA calculations.
Some banks have structured their LIBOR transition programmes just like they structured where a central programme director has disbursed the responsibility of the programme to individual legal entities, departments or functions. Such programmes need a significant stroke of luck to achieve complete LIBOR transition by December 2021. In our opinion, the Global Head of the Corporate and Investment Bank (on the buy-side this might be the Chief Investment Officer and in corporates this could be the Treasurer) has to collaborate with the #CRO and #CFO to take responsibility for the end objective. I know this is easier said than done with these three roles already being under tremendous pressure to deliver revenue, profits and capital optimisation. On the other hand, if they don't collaborate closely on these issues there will be significant challenges are January 2022 might bring a further spate of regulatory and financial challenges to such firms.
It is important to notice here is that though we feel the #COO and the Chief #Counsel have a key role in the programme their contribution, though very intensive, needs to be supportive of the effort.
This post was originally published on Linkedin.