As we recently argued in a separate blog on the key objectives for 2020 from the ARRC, market participants should not expect any support from regulators for significant delays to the transition away from LIBOR. Although COVID-19 was “used” to delay a number of regulatory deadlines, with FRTB as a prime example, for anybody hoping that the LIBOR transition will be delayed by a year as well, we have three simple words:
Not. Gonna. Happen.
Both the US and UK regulators are clearly pushing on with their objectives. We also note for example that the ARRC’s main regulatory milestones for 2020, with the exception of the derivatives discounting, are primarily “paper exercises”, which need not be strongly impacted by the pandemic. Most of the required activities to reach agreement on e.g. SOFR conventions for certain products are already done on “a remote basis” via working group calls and consultations requiring relatively few people from the organisations involved.
IT projects, on the other hand, require a lot more people and coordination between departments and teams that are currently dispersed, especially when outside vendors are involved. Changes to multiple software systems within providers and consumers of new RFR-products will be key to a successful transition. With most financial institutions understandably focused on immediate adjustments to keep the lights on, the COVID-19 pandemic has significantly increased the risks of institutions not able to implement the required system changes in time.
This risk seems highest for Asian lenders, as also reported by Reuters last week. As US and European regulators, especially the FCA and SEC, pushed for urgency early on, banks in those regions started preparing and engaging with their software vendors first. They are nowhere near full preparedness yet, nor are their vendors, but most aimed to have their systems fully upgraded well before the end of 2020.
According to Arnaud Picut, global head of the risk practice at Finastra, provider of LoanIQ, which has a dominating position in the lending software market, Asian clients already were behind before the pandemic. He said, “we are only starting to have meetings with Asian clients about the new software for pricing loans using the alternative rates.” With implementation projects put on hold, due to numerous code freezes at the moment, and inevitably being delayed, due to people not able to work together in offices, that is a worrying statement. In effect, many Asian clients will find themselves in a vendor queue, and that queue has just got longer.
Of course, not everything is dependent on vendors. And of course, your immediate focus has naturally been on an efficient running, survival even, of your bank. But we strongly suggest that, at soon as circumstances permit, you focus on LIBOR transition … again.
Start by informing yourselves, put together a plan and focus on those tasks that you do control. Asian banks may not have (m)any issues with their local benchmarks, but the transition from USD LIBOR to SOFR can no longer be ignored, nor expected to be delayed. As Andrew Ferguson, CEO of the Asia Pacific Loan Market Association said: “anyone writing U.S. dollar loans needs to know exactly what’s going on.”
By Chris Heeringa, Partner Dantum Consulting