This content is applicable to the vast majority of corporations, in their financing activities, as well as to the entire financial services and investment sectors.
Scramble! Just as the Le Mans’ drivers run to their vehicles for one of the greatest endurance races of all time, so too will corporations, banks and buysides as they realise there is no more LIBOR road to travel down, at some point next year. The skilled drivers may well decide who gets a podium finish at Le Mans, but the supporting teams of engineers and suppliers are critical not just to who wins, but more importantly who survives to compete in other future championships.
Time and again, firms react similarly to regulatory deadlines, scraping over the finishing line pulling the dead weight of poorly designed and implemented business process and technology. What typically ensues is an increased cost of doing business inefficiently, some residual risk of non-compliance, and often remedial clean-up exercises. The IBOR transition, directly impacting cash and derivative products, is particularly difficult as there is no prescriptive end state or single, clear solution. The market itself has been expected to drive solutions including the launch of various alternate reference rates (ARRs), fallback and other common standards (developed by the industry), and catalysing events (such as clearing house valuation switches). They are all expected to shed further light on the desirable end state, leading the way for all firms, as well as growing quantifiable levels of support and liquidity. In addition, the international and multi-jurisdictional nature of this transition has resulted in slightly different directions and different paces of change. Despite progress in the major core areas, the weather forecast is still murky and could well become stormy in the last few laps.
Following the endurance race analogy to its conclusion, what should firms do to prepare for the final hours of this race? A podium position may mean winning market share for compatible new products, tested robust & predicatable treasury funding, as well as successfully engaged clients and counterparties through outreach programmes, amongst other things. However, by choosing not to get the mechanics in early enough in the design and implementation phases, it won’t just limit your speed, giving the other cars on the track a clear advantage, but it will bring the real risk of breakdown, engine failure or coming off the circuit altogether. Engineers and suppliers need enough time to build sufficient capabilities & genuine flexibility – taking advantage of current developments and the identifiable direction of travel, but also appreciating plausible edge case scenarios. Reliable term rates is one such pressing challenge, but shouldn’t prevent broader and more fundamental preparations from taking place. Expecting drivers alone to perform under increasing pressure when preparations have not been made is not just foolhardy, but a recipe for disaster.
More information on the IBOR Transition is available upon request. Previous articles also provide further context and detail on IBOR.
Norton Edge & associates provide Subject Matter Expertise, providing a practical guide and assistance through the challenges of capital market regulatory and business driven change.
*photo source: rh karting