LIBOR Transition: Being Forewarned is Forearmed – Part 1

Guest Blog Contributed by Sharon Freeman, Managing Director, Antevorta Consultants Limited

A tremendous amount of information and thought leadership exists for LIBOR transition supported by an assortment of to-do lists, rarely are there any practical solutions for implementation.

In the first of my two-part insights, you’ll find a brief recap of events that allude to LIBOR’s ill-fated situation plus an overview of an approach to cope with the transition, the IBOR Transition Target Operating Model.

Below are highlights – to access the full version, click here.


The LIBOR Transition Backdrop

After the financial crisis of 2007-2008, confidence in the financial industry hit a historic low. Regulators and standards-setting bodies responded quickly to restore confidence and build stability. Extensive regulatory reforms and standards were swiftly conscripted aimed at the financial industry. The financial benchmarks reform addresses the accuracy, methodology, and integrity for various benchmarks including the interbank offered rates (IBOR). They are the most widespread regulatory change directly affecting a broader range of industries and consumers.

During the financial crisis, the scandal of rate-rigging for the London Interbank Offered Rate (LIBOR) first emerged. Despite efforts to adhere to the benchmark reforms1 to restore LIBOR’s fit and proper image, the damage had already been done. LIBOR was unintentionally mortally wounded by earlier regulatory reforms.

Today, LIBOR’s last months of existence are uncertain. There are many who fear this uncertainty, they are not prepared. The others, who do not fear, are prepared with the knowledge to make informed decisions to further their own benefit.


IBOR Transition Target Operating Model (IBOR TOM)

The unprecedented decade of regulatory reform and remediation since the financial crisis has created a tremendous impact on systems, processes, infrastructure, and resources. Business and regulatory change programmes were promptly assembled with little time for considering a strategic approach. A typical response to manage such change, “Let’s throw people at the problem”, “With more people, we can get more things done quickly”. In today’s technically advanced world, however, these simple notions are misplaced.

LIBOR, therefore, should not be approached as “another regulatory change programme”. Why not? Firstly, there are no specific regulations that act as a target operating model i.e. the future state. Without such a handbook you must determine your own IBOR Transition Target Operating Model. 

Secondly, a critical driver of the future state lies in the extensive search, extraction, and analysis of the masses of documentation (and I don’t mean identifying LIBOR in its multiple guises in business contracts). A plethora of information needs to be extracted.

Thirdly, to complicate matters, market forces are already at play which are generating greater uncertainty resulting in multiple versions of the end-game, therefore a flexible target operating model is imperative.

“To pre, or not pre, that is the question.”2 Ok, there are many, many questions…

”To SOFR, or not to SOFR?”3, a question definitely analysing…

“To fallback, or not to fallback?”4 That is a really loaded question…

“To govern by New York law or not?”5 Did you realise that was even a question?

We are therefore left with a market-driven change programme, not another regulatory change programme.

The magnitude of the LIBOR transition can be overwhelming, or its glacial-pace frustrating for some folks who take a siloed programme approach for their business unit or function. This uncoordinated enterprise-wide effort creates a lack of transparency, coupled with the typical manual approach to change, which inevitably leads to significant risks6 and issues7.

For the IBOR Transition Target Operating Model (IBOR TOM8), the change and project management governance structure should be a hybrid model and delivered using appropriate elements from project methodologies9:

  1. Utilising the organisational structure enables familiarity of governance for segregated business units and functions alongside the existing framework to manage principle risks10, together with a
  2. A co-ordinated by a business-sponsored, IBOR astute, centrally run project management office directing 4 key workstreams enterprise-wide; Inventories, Communications, MI & Reporting, and Readiness.

The hybrid model enables business to continue as usual (BAU) while concurrently being aware of and engaged in the right pace of your IBOR transition; reducing the occurrence of gaps, where more often than not that tiny but important cog often gets left behind or forgotten.

Isn’t it about time that you seized this opportunity to future-proof business and regulatory changes? Forewarned is Forearmed.

Read the first part of the full insight by clicking here.

Stay tuned for part two of this series, focusing on ‘why’ and ‘how’ artificial intelligence (AI) can immensely accelerate your IBOR transition, simultaneously enabling control and assurance in an otherwise manually intensive risk-ridden undertaking. Concluding with leveraging the AI-IBOR platform to complement your strategic infrastructure.

1 ICE Presse Releasee October 2014 

2 Dec 2019 FSB & ISDA Pre-Cessation

3 2019 September stress in dollar repo markets: passing or structural  

4 Dr. Marc Henrard 

5 ARRC-recommended SOFR rate/spread adjustment to LIBOR contracts governed by New York law across all asset classes 

6 Risk Management 

7 Issues Management

8 Figure 1 – IBOR Transition Target Operating Model (IBOR TOM)

9 Project Methodologies

10 Corporate and Risk Governance