Will adapting to IBOR reform give you a competitive advantage?
With interbank offered rates (IBORs) set to be phased out as reference benchmarks for interest rates, the financial services industry needs to prepare for the post-IBOR world of 2021 and beyond. But every indication shows that, so far, impacted stakeholders are simply not prepared for the extent of the issues and challenges ahead.
For more than 40 years, the financial services industry has relied on interbank offered rates as a reference rate for variable-rate financial instruments. Now IBOR is coming to an end, driven by:
All variants will be replaced by Alternate Reference Rates (ARRs), which includes the heavily relied-upon LIBOR, frequently referenced in derivatives markets. While working groups are still ironing out the details, and there will be variations across jurisdictions, there is no doubt that the transition from IBOR is a certainty and not a choice.
Huge changes are required for the industry to end its dependency on IBORs by the end of 2021. The transition to ARRs is expected to impact every sector of the financial services industry, including insurance, wealth and asset management, private equity and banking and capital markets. It will have a widespread impact across various functions, business processes and technology.
Given the scale and complexity of this inevitable transition, it is important that market participants initiate steps to prepare now. While 2021 may seem far away, the operational and financial challenges associated with preparing for IBOR transitions are daunting and will take time to work through. Key issues to consider include:
As the pace of change accelerates firms should take action now, kicking off impact assessments and establishing programme governance. It is also important for institutions to proactively engage with regulatory and industry-led efforts to analyse the complex challenges and develop solutions to mitigate risks to their organisations – and to their clients.
The key to an effective transition will be a robust governance structure that oversees the design and implementation of IBOR transition efforts. With that in mind, the three key actions for firms to take now can be summarised as follows:
The financial services industry has an important role to play in educating end users of financial products on the looming risks of ongoing dependency on IBORs and in guiding them through this transition process. Firms that proactively engage with their customers, and offer new products linked to ARRs, are likely to be at a competitive advantage.
Ultimately, the end of the IBOR era will require considerable planning, cost and effort, and the sooner the financial services industry takes action, the smoother the transition will be.
A version of this article first appeared in the Finance Dublin November 2018 edition.