The industry has to contend with the transition away from IBORs to alternative Risk Free Rates (RFR) in arguably the most significant change in the markets for 30 years – Libor has been a pillar upon which the market has been based, and accordingly, a move away represents a very significant challenge.
There are a number of important steps that institutions need to take to prepare themselves for this paradigm shift:
- Develop a project plan with appropriate governance,
- Diagnose where IBOR exist in order to ascertain its exposure to IBORs and formulate a strategy to transition to alternative RFRs,
- Identify the complexity within the different product bases to determine how the contracts will need to be amended. How will this be achieved when each firm has unaligned systems and fragmented systems containing the relevant documentation. A challenge to identify the relevant provisions and categorise into groups that may be prioritised,
- Amending products, which can be very complex especially for syndicated loans and notes. For ISDA, this would likely be by protocol but for other, instruments, more elaborate bilateral and multilateral process will need to be employed,
- Set up future templates and contractual arrangements which reference the relevant RFRs,
- Manage the metadata and record what has been negotiated.
D2LT is helping clients to navigate through this process and our advice is to commence as soon as possible given the pervasive nature of IBOR.
Solutions to the diagnosis of the extent of the exposure will require a combination of: (1) individuals understanding the issues, the fallbacks, the algorithms and the quality control; and (2) technology to provide the leverage (AI/machine learning).