By Robert Downs is Senior Principal Product Manager at Finastra
The London Inter-bank Offered Rate, or ‘LIBOR’, is often referred to as the “world’s most important number”, being deeply ingrained in lending markets worldwide. It dictates the interest rates for a huge percentage of consumer, commercial and syndicated loans, and is hardwired into financial derivatives internationally. LIBOR was first established in 1986, and today 97% of syndicated loans reference LIBOR in the US alone, with an outstanding volume of approximately $3.4 trillion. To top it off, LIBOR serves seven different maturities and is based on five currencies: USD, EUR, GBP, JPY, and CHF, meaning there are 35 different LIBOR rates published each business day.
As we move closer to the phase-out deadline of LIBOR in 2021 announced by the FCA back in 2017, its omnipresence in the market means the transition away from LIBOR could be extremely disruptive if banks and financial firms aren’t prepared. In this article, I will outline some key considerations and preparations for banks moving into a post-LIBOR world.
Multiple ‘risk-free rates’ (RFR) will take LIBOR’s place, comprised of benchmark rates originating from the US, the UK, Europe, Switzerland and Japan. Each has unique characteristics in currency, posting timing, security and underlying sources of data. Ultimately, this will lead to a high level of complexity for banks that have various loan instruments on their books. Depending on the jurisdiction, these RFRs may be any of the following:
- Pound Sterling (£) SONIA (Sterling Overnight Index Average)
- US Dollar ($) SOFR (Secured Overnight Financing Rate)
- Swiss Franc (CHF) SARON (Swiss Average Rate Overnight)
- Japanese Yen (¥) TONAR (Tokyo Overnight Average Rate)
Moving away from LIBOR to these overnight RFRs will create multiple financial and operational challenges for borrowers, lenders and agents. For example, an overnight RFR does not compensate the lender for bank credit or term risk, whereas LIBOR includes a premium on longer-dated funds. Additionally, moving to an overnight RFR would require treasurers to keep extra cash reserves to respond to movement in the interest rates.
Banks must prepare for a period where some deals remain linked to LIBOR while others will have transitioned to a new RFR, depending on the jurisdiction of the instrument. This challenge will be particularly applicable to commercial and syndicated lenders that operate cross-border. It will also be vital that banks and participants familiarize themselves with the publication timings of each rate. Today, LIBOR is published as of 11:00 GMT across each currency; however, other RFRs are published at different times throughout the day, which may cause complications.
Multi-currency complexity preparation
Cross-border lenders will need to consider potential operational impacts of using RFRs denominated in different currencies. The most convenient element of LIBOR is that it is quoted on the same basis for each LIBOR rates, whereas RFRs are generally currency-specific. Therefore, there is potential for issues in the loan market when drawings in different LIBOR currencies under the same facility are priced at the same margin. If different RFRs are used for different currencies, it may require a different margin per currency, which could create added complexity for borrowers and lenders. This can be particularly true for syndicated loans, which are often structured using multiple currencies.
A closer look at fallback language
Familiarization of existing fallback language and a proactive approach to addressing the way it will be updated to reflect a post-LIBOR world will be essential for lenders and borrowers.While there are fallback clauses in place within loan contracts, if there is an underlying benchmark unavailable for temporary technical reasons, existing fallback language may no longer be suitable long-term. In line with this,agent banks and lenders will need to review existing fallback language and make necessary adjustments in anticipation of variables stemming from new benchmark rates. Contract fallback language should allow for a spread adjustment to minimize valuation changes. Suggested contract fallback language should also include specific triggers that enact the shift to successor rate(s). It will be vital that the choice of a new benchmark rate, spread adjustment and the timing of the transition is clearly communicated to all borrowers and lenders involved.
There will need to be considerations of time and cost implications associated with amending and renegotiating each individual loan agreement to a new mutually agreed upon benchmark. It will also be important to consider how new clauses and potential wording can be operationally managed without introducing additional overhead and processing costs.
Engaging with lenders and borrowers
During the transition, minimizing business disruption should be a top priority. Agent banks should aim to anticipate any potential communication issues with syndicated lenders and create a cross-functional plan to avoid any disruption. Each loan agreement linked to LIBOR may need to be redrafted and agreed upon by the borrower, agent, and lender(s). It is critical that this communication is efficiently managed and documented, because if the new rate being adopted is higher or lower than LIBOR, there will be winners and losers in any renegotiation. This raises the potential for costly disputes and business disruption. If the new rate differs substantially enough from LIBOR,the likelihood for disagreement is high.It will therefore be essential to have risk mitigation strategies and communications plans in place.
The global lending market will undoubtedly face significant disruption over the next 36 months and beyond. The disruptive nature of the LIBOR transition is further amplified by the fact that several key elements are missing: a centralized coordination of currency working groups around the rollout, the adoption of forward-looking term rates, standardized fallback language and proactive communication. Though many institutions are already taking a proactive approach to making the shift before LIBOR completely phases out, this won’t be as easy as simply flicking a switch. Banks will need to work proactively and efficiently to streamline operations ahead of the changeover to ensure a smooth transition for itself and all loan participants.
Staying connected: keeping the numbers moving in the finance industry
By Robert Gibson-Bolton, Enterprise Manager, NetMotion
2020 will certainly be hard to forget. Amongst the many changes we have come to live with, for many of us it has been adapting to a new style of working. Whatever your take on it is, remote working, working from home or even agile working, one thing remains clear – for many of us, this could be the new-normal for the foreseeable future. The professional services sector is no different. For example, many finance practices around the world are now allowing staff to work from home part of the time. In addition, a recent KPMG report found that half of the UK’s financial services workforce want to work from home after COVID-19.
Will this therefore become the de facto working practice for the finance industry too? We can’t say for sure, but this agile approach to working has certainly caused a major rethink for many firms. And as they evolve and adapt to meet the demands of a different way of working, firms need to ensure that their workforce can seamlessly interact with each other and their clients – this is key if they want to continue to deliver exceptional client service. Whilst financial services organisations everywhere are busy adopting innovative new technologies to better reflect the ‘work from anywhere environment’, they need to ensure secure access to resources and strive towards enhancing the end user experience. Success will be replicating the office working experience at home or wherever else they may be.
It’s all well and good for a firm to boast about the ability of their staff to work successfully from home, but how do they also establish that their people are just as productive as they were before? Whilst the IT department will have to grapple with security and compliance issues that arise from agile and remote working, they must also ensure that their people can connect securely, without eschewing user experience. And it needs to be completely seamless, without compromising the service level provided to clients.
Why all the fuss?
Which brings us nicely to persistent connectivity. Persistent connectivity effectively allows you to do more. How frustrating for the user when connectivity drops, or when the device that they are working on can’t find a network to connect to (or if the device switches between different networks). When connectivity drops, and re-connection is required then there is that small period where the user is not connected at all. And the user might have to re-authenticate or log into their VPN again (most VPNs are rubbish when they lose connectivity). All of these different scenarios ultimately disrupt the user experience – persistent connectivity provides the flexibility to overcome these challenges. When you enjoy consistent connectivity, you are making sure that the technology works as it was designed to work, allowing staff to rely on optimum user experience, anytime, anywhere – in effect, supplying them with that office-like experience, wherever they are. Just think about how many hours might be spent on a train, in a hotel or even on a client site. Consistent connectivity is key here – consistent in any of these locations.
Connectivity will be a fundamental component for successful remote working as firms try to meet the demands of an increasingly mobile workforce. Ultimately, they need encrypted and reliable connections that enable them to quickly and easily reach business applications and services. Working in a disconnected environment can lead to frustrated workers, hardly fitting given all the new remote working policies in place.
Getting the user experience spot-on
When you fine-tune connection performance so that essential business applications run reliably across networks, you are essentially talking about traffic optimization. Mobile traffic optimization ensures that applications, resources and connections are tuned for weak and intermittent network coverage and can roam between wireless networks as conditions and availability change. When connections aren’t performing well, applications that are crucial for job performance can experience packet loss, jitter or latency that can make working on the hoof extremely tricky. Compared to wired networks, wireless networks operate under highly variable conditions, including such factors as terrain or congested mobile towers. When you optimise the flow of traffic, you are helping to manage packet loss. Effectively, packet losses are data loss, which happens very regularly when you’re on the move or transitioning between different networks. Applications that require a lot of data tend to become fairly unusable when you hit even minor packet loss, which can be a common occurrence for many on residential broadband or on local Wi-Fi. conversely, NetMotion can enable critical applications to work and prevent disruptions at over 50% packet loss – in this way, employees can rely on technology performing well in situations and locations where it simply could not before. That is incredibly powerful for firms.
The finance industry is facing many of the same challenges presented to other industries. It is a question of balancing the requirement for more sophisticated ways to ensure secure access to resources with the need to enhance the end user experience (key team members in particular). For finance firms everywhere, adopting the right technologies will ensure that their people can enjoy a ‘work-from-anywhere’ environment.
Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn
(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.
Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.
Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.
“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.
The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.
“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.
The government did not immediately respond to a request for comment.
Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.
The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.
In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.
($1 = 7.7512 Hong Kong dollars)
(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr and Arun Koyyur)
Travel stocks pull FTSE 100 lower as virus risks weigh
By Shashank Nayar
(Reuters) – London’s FTSE 100 fell on Monday, with travel stocks leading the declines, as rising coronavirus infections and extended lockdowns raised worries about the pace of economic growth, while fashion retailers Boohoo and ASOS gained on merger deals.
The British government quietly extended lockdown laws to give councils the power to close pubs, restaurants, shops and public spaces until July 17, the Telegraph reported on Saturday.
The blue-chip FTSE 100 index dipped 0.1%, with travel and energy stocks falling the most, while the mid-cap index rose 0.1%.
“Stock markets are crawling between optimism around the rollout of vaccines and worries that a jump in virus infections and fresh local lockdowns could further affect recovery prospects,” said David Madden, an analyst at CMC Markets.
Britain has detected 77 cases of the South African variant of COVID-19, the health minister said on Sunday while urging people to strictly follow lockdown rules as the best precaution against the country’s own potentially more deadly variant.
Prime Minister Boris Johnson had earlier warned that the government could not consider easing lockdown restrictions with infection rates at their current high levels and until it is confident that the vaccination programme is working.
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy.
Online fashion retailers Boohoo and ASOS surged 4.8% and 5.9%, each. Boohoo bought the Debenhams brand, while ASOS was in talks to buy the key brands of Philip Green’s collapsed Arcadia group.
Recruiter SThree Plc gained 0.9% after its profit, which nearly halved, still managed to beat market expectations and the company said it had resumed dividends.
(Reporting by Shashank Nayar in Bengaluru; editing by Uttaresh.V)
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