United States

The clock is ticking on the end of Libor: Does your firm have a plan?

A lack of action today will only create more problems

INSIGHT ARTICLE  | 

As the global coronavirus pandemic continues to take its human and economic toll, financial services firms have been dealing with a dramatically changed economic landscape. But one important topic that has not changed is the upcoming phaseout of Libor at the end of 2021.

This phaseout is nothing new to financial services firms. It was set in motion in 2017, and as the clock continues to count down, financial services firms need to assess their exposure to the change and create a transition plan.

Even with the upheaval of the pandemic, the deadline remains on track. In July, New York Federal Reserve President John Williams said as much, and urged banks to get ready.

“It doesn’t matter whether you’re a large global bank or a local company with a handful of employees, you need to be prepared to manage your institution’s transition away from Libor,” he remarked in a presentation on the transition away from Libor.

Now, the only option left is to plan and prepare. A lack of action will not only create resource constraints at the eleventh hour, but it could also bring unwanted attention from financial services regulatory agencies.

Impact is far reaching

What makes the shift from the use of Libor so challenging is how deep and interwoven it has become in every corner of the financial services industry, from insurance companies to financial institutions and lenders to investment banks and asset managers.

According to the International Swaps and Derivative Association, there is roughly $200 trillion in financial products linked to U.S. dollar Libor within U.S. financial markets. But its impact goes far beyond this number because that does not take into account other products that financial services firms may have with their customers, such as loans and deposits.

So not only will financial services firms have to identify the instruments linked to Libor, but they will also have to analyze how a change to an alternative reference rate affects earnings and valuations. This will require measurable resource allocation to ensure that disruptions to a firm’s operations are prevented and that any impact to earnings and financial performance is mitigated as well.

Regulators taking notice

In July, a variety of regulatory agencies responsible for governing financial services firms issued statements concerning Libor and the related transition to alternative references rates.

In a statement issued by the Securities and Exchange Commission (SEC), the agency said, “The expected discontinuation of Libor could have a significant impact on the financial markets and may present a material risk for certain market participants, including public companies, investment advisers, investment companies and broker-dealers.” The statement went on to say, “The risks associated with this discontinuation and transition will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner.”

Likewise, the Federal Financial Institutions Examination Council (FFIEC) released a statement highlighting the “the financial, legal, operational and consumer protection risks that will result from the expected discontinuation of the Libor.” The FFIEC statement went a step further to communicate to those supervised institutions that supervisor activities will begin to look at an institution’s Libor transition preparedness beginning in the second half of 2020.

Take action now

The phaseout of Libor may seem distant, especially for firms consumed with the challenges of the coronavirus pandemic. But the end date will come sooner rather than later – especially for those firms that do not start planning now.

For those unsure where their organizations transition stands, ask the following questions:

  • What governance structure have you set up to manage the Libor transition?
  • What is your Libor transition plan?
  • What products and processes will be affected by the Libor transition?
  • Have key stakeholders in your organization been engaged in the Libor transition process?
  • Do you have adequate resources dedicated to the Libor transition?

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