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June 27, 2019 Insights

The Interbank Offered Rate Endgame is Coming – What You Need to Know

By: Navin Mahavijiyan

Interbank Offered Rate (IBORS)s, like the London interbank Offered Rate (LIBOR), have long served as benchmarks for a breadth of financial products and contractual agreements. However, this long storied, and sometimes scandal ridden history, is coming to an end.

Yes, IBORs are getting snapped out of existence, and many institutions are still struggling to both come to come to terms with this reality, as well as prepare for it. With LIBOR alone, the changes needed to prepare for the deadline are, to quote Eric Litvack, Chairman of the International Swaps and Derivatives Association, “…arguably the most challenging and complex task the industry has ever faced”.

Alternative Reference Rates are Inevitable

Regulators are continuing to advise, with increasing urgency, that market participants migrate existing and new products to Alternative Reference Rates (ARR) such as the Secured Overnight Financing Rate (SOFR). The risk of market disruption is very real and there is an underestimated and underserved need to educate a variety of groups across buy and sell sides of the markets.

What is even more concerning is that a substantial number of organizations still refuse to move on, either due to a lack of awareness of the scale and impact of the transition or the misplaced hope that the 2021 deadline is suggestive, and that IBOR referencing will continue unabated.

IBOR Transition Team – Time to Assemble

Impacted organizations need to act immediately as every day lost will amplify the resource drains and cost of an inevitable transition exercise. An executive or senior leadership-led transition team comprising of key individuals across impacted business lines should be convened to assess the full impact to the organization.

The transition team will need to scope the organizations’ existing body of contracts, prospectuses, and other impacted documentation to determine appropriate fallback language and to build and execute a remediation initiative. A silver lining to this monumental task is that new products and instruments can utilize ARRs as benchmarks from their inception.

Counterparty outreach is a final, but a critical piece of this transition puzzle and must work hand in glove with a remediation exercise. Discussions to alter and amend reference rates seldom go the way, for example, typical repapering exercises to insert compliant language do. The lack of awareness and knowledge of counterparty representatives can greatly slow down the repapering exercise. Clear, concise, and sustained communication by the organization to its counterparties, investors, and associated agencies is essential to successfully complete the process in a timely manner.

Organizations that have not taken key steps to transition to ARRs find themselves in a murky and concerning space as the end of 2021 barrels toward them.

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