LIBOR Transition: Being Forewarned is Forearmed

Authored by Sharon Freeman, Managing Director, Antevorta Consultants Limited


The LIBOR Transition Backdrop

The financial crisis of 2007-2008 saw casualties across both the real economy and the financial economy. The ensuing months saw consumer confidence in the financial industry hit a historic low. It was not surprising that regulators1 and standards-setting bodies2 around the world responded quickly to restore confidence and build stability. Extensive regulatory reforms and standards were swiftly conscripted aimed at the financial industry by tightening the rules and reporting requirements in which the financial, insurance and pension industries operate.

Dodd-Frank3, Basel III4, Solvency II5, EMIR6, MiFID7, BCBS-IOSCO8 and their risk reduction initiatives (Volcker Rule, QFC, Ring-fencing, CCP, FRTB, UMR, SM&CR, etc) are just some of the regulatory reforms and standards that have fundamentally altered the financial ecosystem we see today.

The most widespread regulatory change directly affecting a broader range of industries and consumers are applied to financial benchmarks. These regulatory reforms address the accuracy, methodology, and integrity for various benchmarks including the interbank offered rates (IBOR).

LIBOR, the London Interbank Offered Rate, is the most extensively used interest rate benchmark throughout the world. It is based on transactions where creditworthy banks would lend money to each other at a certain rate, for a particular currency (USD, GBP, EUR, CHF, JPY) borrowed over a specific period of time. (USD is the most referenced currency for periods of 1 month, 3 months and 6 months.)

LIBOR’s usage is vast, buried deep in documentation ranging from student loans to complex derivatives to structured lending facilities to tax-efficient vehicles (ETF, UCIT, REIT, etc) as well as entwined in risk models, restructuring defaulted loans, discount rate formula, fee arrangements, threshold triggers, hedge fund performance measures, to name a few.

During the financial crisis, the scandal of rate-rigging for LIBOR first emerged. This scandal instigated a series of benchmark reforms; the FSB’s report on Reforming Major Interest Rate Benchmarks9, the IOSCO Benchmark Principles10 and the EU Benchmarks Regulation11.







Despite efforts to adhere to the benchmark reforms12 to restore LIBOR’s fit and proper image, the damage had already been done. LIBOR was mortally wounded. The wave of regulatory reforms unintentionally made traditional LIBOR lending amongst banks very costly causing bank-to-bank LIBOR transactions to dwindle. Banks, therefore, could no longer reference actual transactions, instead, they used their expert judgment in contributing rates to create LIBOR.  The use of “expert judgment” as the main methodology does not fully satisfy requirements under the new benchmark reforms.

Today, LIBOR is designated a critical benchmark. It is expected to continue until 31st December 202113, however, there are a number of competing influences and dependencies which may see that date either brought forward14 or pushed out15. 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, they are prepared with the knowledge to make informed decisions to further their own benefit.

IBOR Transition Target Operating Model (IBOR TOM)

Since the financial crisis, the unprecedented decade of regulatory reform and remediation (mis-selling of interest rate swaps and retail mortgages, fictitious opening of bank accounts and credit cards, data breaches, rise in financial crime) has created a tremendous impact on systems, processes, infrastructure and resources – the increasing demand to be compliant, to enable rapid responses, to enhance governance and accountability.

Business and regulatory change programmes were promptly assembled with little time for considering a strategic approach because they were left too late to mobilise, inappropriately scoped and poorly planned or the solutions delivered were designed with tunnel-vision to quickly resolve the problem at hand. How quickly can we get compliant with the rules? How quickly can we remediate the erroneous or wilful errors? Why quickly? Understandably, everyone wants to get back to business-as-usual (BAU) – to reinforce customer confidence, to grow market share, to reward shareholders with a good ROE. And for organisations to rid themselves of change-programme-fatigue.

The typical response to manage such change is, “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. For complex and intensive enterprise-wide change, manual intervention creates a host of issues: a higher occurrence of errors, attracts more risk, compromises quality, forces additional quality controls/assurance (which are manual!) causes delays, increases costs, impacts reputation, causes substantial challenges when ensuring consistent analysis and implementation, hampers the ability to present an holistic view to key stakeholders (clients, regulators, risk committees, C-suite, the Board, shareholders).

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. There are unlikely to be specific regulations or else this could be viewed as blurring the lines of regulation and market evolution. Thus viewing LIBOR as a market-driven, business change programme ensures a strategic alignment. 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.”16 Ok, there are many, many questions…

”To SOFR, or not to SOFR?”17, a question definitely analysing…

“To fallback, or not to fallback?”18that is a really loaded question…

 “To govern by New York law or not?”19  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 inadequate project plans based on a raft of inaccurately assessed significant risks20 and issues21 considered against flawed dependencies and assumptions.

FIGURE 1 – Illustration for a Financial Services organisation, however, the template can be adapted for all organisations using the same programme approach.

For the IBOR Transition Target Operating Model (IBOR TOM22), the change and project management governance structure should be a hybrid model and delivered using appropriate elements from project methodologies23:

  • Utilising the Organisational Structure. Create a programme or project plan for:

(a) each business unit, front to back through its functions, and

(b) each function, left to right across its business units and intra-functions (legal vs operations).

The organisational structure enables; familiarity of communication channels, a chain of command from senior management, governance for business units and functions with clear lines of responsibility and accountability, an active prioritisation of matters aligned to the firm’s strategy which are all important cornerstones for facilitating successful delivery24.

  • Co-ordinated by a Central Programme Team. A business-sponsored, IBOR astute, centrally-run project management office giving direction through 4 key workstreams enterprise-wide; Inventories, Communications, MI & Reporting, and Readiness.

It is critical that senior members of the central programming team have knowledge of IBOR transition markers and red flags to shape and dovetail the centralised plans with key stakeholders.

The business and function plans extract the relevant milestones and deliverables contained in the master plans of the key workstreams. The business units and functions build-out their own specific milestones and deliverables to achieve the master plans, milestones, and deliverables. These dynamic inter-locks act to form a governance that is centrally controlled and monitored to ensure consistency and pace as well as transparency across the enterprise avoiding bi-lateral or fiefdom solutions breeding risks.

  • IBOR Transition Risk & Issues Management. Business units and functions can apply IBOR risks and issues against their existing framework to manage principle risks25. The IBOR transition risks and issues identified at a granular level from the business unit and/or function are naturally aggregated to provide the Central Programme Team sight across the enterprise-wide principle risks. Using the existing risk management framework enables the correct ownership, right level of supervision, resolution, reporting, and escalation without creating an excessive administrative burden.

The hybrid model enables your business to continue as usual 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?

Overcome challenges associated with documentation-intensive programmes by investing strategically in an adaptable and evolutionary solution which will leave you well-positioned to leverage the depths and scale of data not previously attainable. Moreover, readily affording you insights into analytics you didn’t even know you needed! Forewarned is Forearmed.


Stay tuned for part two of this series.