One crucial difference between the cessation of LIBOR for US dollar-denominated contracts on 30th June 2023 and the December 2021 deadline for the cessation of LIBOR 1-week and 2-month is in the volume of products linked to the legacy benchmark.
This means market participants still have a lot to do according to Didier Loiseau, Global Head of Trading and Financial Engineering at treasury fintech Murex.
“For example, banks in Latin America and South-East Asia had very little exposure to sterling, yen and Swiss franc LIBOR products, but have a much greater percentage of USD LIBOR-linked products in their portfolios – meaning many firms will be dealing with the transition without the experience of 2021 and the other three legacy rates,” he says.
There will be market participants for whom the US dollar LIBOR transition will be their first and the risks that smaller US regional players are not as prepared as they might be should also not be underestimated says Julien Ray, Executive Director Data, Valuations & Analytics at S&P Global.
“Some firms are highly prepared as they transitioned their exposure to the Secured Overnight Financing Rate (SOFR) and other alternative rates pre-emptively and/or performed a thorough review of their current exposure, whereas others have adopted more of a wait-and-see approach,” he says. “The LIBOR Act signed into law on 15th March will help minimise litigation risks after 30th June 2023, but firms should not be complacent.”
In the US alone there are in excess of 5000 financial institutions, many of which do not have non-USD exposure.
Some of those participants that do not have significant USD LIBOR exposures have temporarily scaled back the project set-up and will look to ramp up again closer to the cessation date agrees Shankar Mukherjee, Business Consulting Partner at EY.
“The significant number of firms that are doing this for the first time will be at varying levels of maturity in their understanding of what needs to happen,” he says. “Some education would have happened through the large global firms that have been educating their clients over the last few years, but these firms will have to now turn to execution of this complex challenge that will impact many functional areas.”
From a technology perspective, Ray cautions that market players have limited funds available and need to really understand how to use and optimise them through a combination of building in-house and using third-party data, platforms and solutions.
Volatile capital markets have not helped promote progress given lack of deal activity observes Tal Reback, Director at global investment firm KKR with responsibility for leading its global LIBOR transition.
There is no one-size-fits all approach with respect to data or technology functionality for the transition as every institution, non-financial corporate and/or market participant is set up uniquely, he says. “That statement rang especially true for the loan market given the bespoke nature of loan contracts. Industry working groups, vendors and market software and data providers continue to enhance functionality as the transition ensues.”
For the transition of contracts from LIBOR to new risk-free rates – whether through the use of fallback language, bulk transition via CCPs, or active transition – firms have designed technology solutions where feasible. But Mukherjee warns that there is still a level of manual processing required for transactions that don’t transition via technology solutions as well as contingency requirements.
“For firms that have significant non-USD exposure, most of the technology investments have already been made when transitioning GBP, CHF and JPY LIBOR,” he adds. “However, like most significant change programmes some of the solutions are tactical in nature and further investments will be needed to embed strategic solutions over time.”