“Leaving LIBOR Behind” – How to Transition Safely and Securely to Risk-free Rate Benchmarks

By Martijn Groot, VP Marketing and Strategy, Asset Control

Some of the most important time series in the world – the interest rate reference rates for the world’s major currencies – are being reformed. This includes a transition from the London Interbank Offered Rate (LIBOR) – whose credibility as a benchmark has been undermined over time – to SOFT in the US, to ESTER in the Eurozone and to SONIA in the UK. Across Europe, there is regulatory impetus behind this transition in the form of the Benchmark Regulation (BMR).

 Scoping the Challenge

This reform is putting huge pressure on financial services firms the world over. At a macro level, it means they will have to replace their interest rate curves and any contracts or derivative instruments that depend on those. It also means that they may have to maintain two sets of interest rate curves in the interim – which many systems have not been designed for.

For firms today, this transition is likely to bring huge disruption, comparable in terms of its impact to the introduction of the EURO that replaced national currencies across Europe around twenty years ago. It places a vast number of new tasks onto firms; ‘to do’ lists. That’s because LIBOR is effectively embedded in firms’ operating models and therefore transitioning away from it will affect how they manage risk and price their contracts amongst a wide range of other potential impacts.

More specifically, firms will, for example, need to scan their pricing, risk and front office system to use the new curves. And they will also be required to re-paper existing contracts with maturity dates beyond LIBOR end-of-life.

Perhaps even more urgently, they will need to review and revise their market data management, including setting up a parallel set of curves based on the new reference rates, managing two sets of curves during a transition period; creating historical data sets that draw from both sets for future risk management needs, and making sure the pricing, risk and front office systems are being fed with the new curves. This is not simply a matter of replacing one number with another as the new regimes will differ also in the time (T or T+1) when rates are made available and the term structure covered. This will also require audit trails and ways to identify which products use which curves.

Finding a Way Forward

All in all, it is a complex undertaking. Most financial services firms don’t have the time, money, in-house expertise or resource to handle it seamlessly and efficiently in isolation. That’s why opting for a managed services approach can make sense in this context, allowing firms to cost-effectively process change, while continuing to focus on their client and differentiating services.

It is also why Asset Control has introduced Libor Pass porting, supporting firms’ journey from the old to the new interest rate benchmark regime. Libor Pass porting is an example service of our AC PaSS managed services set in data management, providing both cost-effective, target data management use cases and off the shelf business logic and data checks that incorporate best practices. It comprises off the shelf integration with selected market data providers and the configuration and distribution options that supplement your infrastructure.