IBOR reform

A new era of benchmark rates
Transition away from the London Interbank Offered Rate (LIBOR), and other IBORs, represents one of the biggest challenges facing financial services firms. Successful management will require significant change and strategic risk management – from adjusting risk profiles and models to navigating an uncertain regulatory landscape.
Act now to ensure a successful transition

The future of IBORs

LIBOR underpins contracts affecting banks, asset managers, insurers and corporates estimated at $350 trillion globally across most national currencies. Yet despite being one of the most significant reference rates used by financial market participants, the last financial crisis revealed its inadequacies.
LIBOR regulators (including the UK Financial Conduct Authority and the US Commodity Futures Trading Commission) have since announced a transition away from LIBOR, and towards alternative risk-free rates (RFR).
The FCA has made clear that, at the end of 2021, it will no longer seek to persuade, or compel, banks to submit to LIBOR. Other regulators have made similar statements.
RFRs have been agreed for all LIBOR currencies, and industry coordinated efforts in support of the transition to these rates has commenced, including the establishment of working groups to facilitate the required response. Yet some regulators have flagged that the transition is not happening fast enough. Further to this, while LIBOR may be the most significant Interbank Offered Rate (IBOR), transition away from other IBORs is also on the regulatory agenda.
Undertaking this change could bring considerable cost and risk to firms, but early planning and an understanding of how to manage the impacts can promote an orderly transition and limit disruption.

$350 trillion

in financial products is underpinned by LIBOR.

“Firms that we supervise will need to be able to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR.”

Andrew Bailey, Chief Executive of the FCA

The potential impacts

Financial exposures continue to grow

Systemic risks are arising as financial exposures increase.

See the impact

Continuing to issue new LIBOR-linked contracts, which mature post-2021, when alternative RFR products have become a viable option, will lead to avoidable growth in exposures, and increases in associated risks.

Take action

  • Establish a strategy and target for reducing LIBOR exposures
  • Consider how best to build demand for RFR-linked products
  • Put in place the capability to monitor and manage LIBOR exposures

Insufficient liquidity of risk-free rate (RFR) products

Insufficient RFR liquidity makes it difficult to build a yield curve and price products.

See the impact

A lack of liquidity may mean that firms are unable to build a curve and price products effectively. This could give rise to client and counterparty complaints in the future and, in addition, to issues for the firm itself in relation to appropriate hedging.

Take action

  • Monitor liquidity on legacy LIBOR and new RFR-linked products across jurisdictions
  • Decide whether to contribute to RFR liquidity by issuing RFR-linked products
  • Assess whether a term rate is essential for all parts of the market

Frontline staff lack awareness

Lack of staff training leads to poor client outcomes or unintended internal consequences.

See the impact

Insufficient and uncoordinated training on new RFR products and transition impacts could lead to conflicting messages from different business areas. Further, frontline staff could promote products in a way which is not aligned to firm strategy, or one business area could switch to an RFR without considering the implications for another (e.g. hedge accounting issues).

Take action

  • Implement an internal communications strategy
  • Consider rolling out training programmes, leading practices and a “red-flag” system, which highlights key issues employees should consider before taking action or triggers a process by which to escalate certain issues

Conduct risks not appropriately managed

Information asymmetries, inadequate disclosures and conflicts of interest give rise to conduct risk.

See the impact

Transitioning the reference rates for products could create winners and losers – with one party paying or receiving more or less. If the process is not managed appropriately and transparently, customers could file complaints or claims of unfair treatment. This risk is heightened as firms are likely to have greater insights than clients into the advantages and disadvantages of transition.

Take action

  • Establish a clear client communication strategy
  • Have a system in place to distinguish between customer types
  • Ensure disclosures are clear, fair and not misleading
  • Ensure customers understand the risks or outcomes they might face from transition

Contractual language not sufficiently robust

Reliance on existing fallback language gives rise to legal risk

See the impact

As the methodologies for calculating LIBOR and RFRs differ, amending legacy contracts to refer to RFRs could be more financially advantageous for one party. Consequently, there is a significant risk of contract frustration if fallback provisions in standard-term legacy contracts, which are unsuitable for the event of permanent LIBOR discontinuation, are not updated to provide robust contractual protection.

Take action

  • Analyse contractual language and affected counterparties early
  • Amend contracts to address permanent discontinuation scenario
  • Ensure compliance with EU BMR

Accounting implications affect validity of existing contracts and hedge relationships

Accounting implications may result in derecognition of contracts and/or discontinuation of hedge relationships.

See the impact

Counterparties will need to assess whether a reference rate replacement for a legacy contract constitutes a substantial modification and therefore ‘derecognition’ under IFRS. Firms will need to consider whether a change in a hedging instrument’s terms will lead to a cessation of the hedge relationship and assess any implications for designated cash flow hedges that hedge LIBOR cash flows beyond transition.

Take action

  • Identify instruments that might be affected by accounting issues
  • Consider whether repapering is needed and evaluate how existing hedges might be affected by this
  • Educate staff and engage customers to ensure implications are understood and required responses are put in place

Tax issues stemming from contract amendments

Transition of contracts to alternative RFRs may result in potential tax issues if implications of amendments are not given due consideration.

See the impact

In certain jurisdictions, changes to existing contracts, if considered material, may constitute a disposal of the existing contract and entering into of a new contract for corporation tax purposes.

Take action

  • Consider whether tax events would be triggered by existing terms and conditions
  • Identify tax implications associated with repapering (i.e. review amendments to contracts together with envisaged accounting treatment)
  • Review any new intra-group arrangements from a transfer pricing perspective

Operational readiness and compliance requirements not appropriately identified

The broader impacts of transition, including operational issues and existing regulatory rules, lead to delays.

See the impact

Changes to firms operating models are expected to be significant given the extent to which LIBOR is likely to be embedded in systems and processes. Firms should also identify areas where there are LIBOR dependencies and potential complications in meeting regulatory rules. (E.g. lack of liquidity in new RFR or legacy IBOR benchmarks may impact use of internal models to calculate regulatory capital requirements).

Take action

  • Ring-fence sufficient time and resource to identify and make operational changes
  • Include broader impacts, and consider wider rules, such as margin requirements and the Fundamental Review of the Trading Book, in the initial impact assessment

Ineffective industry action

Insufficient industry action, a risk due to the lack of a regulatory or legislative mandate for transition, leads to delays and/or sanctions.

See the impact

With no regulatory or legislative mandate in place in support of transition, responsibility for proactive engagement has been placed on market participants. Should firms fail to engage, they may miss key market opportunities or face regulatory intervention, including sanctions, if authorities determine that they have failed to act in the best interests of their customers or manage risks effectively.

Take action

  • Educate senior stakeholders on why it is essential to mobilise and fund a programme
  • Engage with industry working groups, central banks and regulators
  • Keep plans documented throughout and maintain progress dashboards for use in stakeholder engagements

Impact of other global benchmark reform efforts

Failure to focus sufficiently on the switch from EONIA and the future of EURIBOR, as well as other global reform efforts in 2019, could cause disorderly transition.

See the impact

If firms are not ready in time for EONIA and EURIBOR transition, loss in business and reputational damage could result from contracts becoming inoperable. Firms should continue to monitor developments regarding possible amendments to EU BMR transitional provisions, as well as other global efforts to reform interest rate benchmarks, and understand where and how they will be impacted.

Take action

  • Have a clear view on what is achievable in time for the 1 January 2020 deadline for EU BMR
  • Apply lessons learned from the transition of EONIA, and possibly EURIBOR, to the transition of LIBOR
  • Monitor benchmark reform effort across other jurisdictions

Deloitte IBOR Watch

Build your IBOR analytics capability with Deloitte’s IBOR Watch
To help firms design and guide their IBOR transition programmes, we have developed the IBOR Watch tool to support firms at each stage of transition planning, offering views of:
  • Exposure identification
  • Risk scoring
  • Scenario analysis
  • Market developments
  • Financial impacts
  • Wind down position tracking
  • Steering Committee summaries
By using IBOR Watch, clients will be able to better understand the scale of their IBOR exposures and have greater confidence in moving to alternative risk-free rates.

See IBOR Watch in action in our video.
In using the tool, clients will better understand the scale of their IBOR exposures and be more confident in moving to alternative risk free rates.

The dates you need to know

Navigate the important milestones and deadlines firms need to keep abreast of with our timeline.
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Last updated on: 10 July 2019

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Notes:

Users of the Deloitte LIBOR timeline tool should be aware that it is updated, on a best effort basis, quarterly and was last updated on the date shown in the ‘Last updated on [date]’ timestamp at the top of this page; regulatory changes subsequent to this date will not be reflected.

The Deloitte LIBOR timeline tool is not intended to serve as legal advice and is provided for informational purposes only and therefore cannot be relied on to cover specific situations. The use of this tool does not guarantee compliance with any local or international law or regulation. It is not intended to form the basis of any decisions and you should not rely on its content for any purposes whatsoever. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of using this tool.

How you can act now

Get sponsorship from your senior stakeholders
Mobilise your delivery programme
Complete your initial impact analysis
Stop the problem getting worse
Engage externally and monitor industry response
Communicate your transition strategy to customer facing teams

The latest analysis

Stay up-to-date on the latest LIBOR and IBOR transition developments and what your firm needs to be doing in readiness.

External publications

Discover the most important updates and announcements from key industry bodies and institutions.

Main IBOR Reform Working Groups

Selected Other Industry Working Groups

Get in touch

Our team are working with firms across the industry to assist them with their IBOR transition. To find out more and how firms are readying themselves for the change, please complete the form below and we’ll get in contact with you.

Alternatively, you may wish to submit a formal Request for Proposal (RfP).
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IBOR reform experts

EMEA

Ed Moorby

Partner (UK), Financial Services Risk Advisory

Stephen Farrell

Partner (UK), Financial Benchmarks Assurance and Advisory

Mark Cankett

Partner (UK), Financial Benchmarks Assurance and Advisory

Russell Hulett

Partner (UK), FSI Finance Transformation Consulting

Americas

Nitish Idnani

Partner (US), Risk and Financial Advisory

Alexey Surkov

Partner (US), Risk and Financial Advisory

Clifford Goss

Partner (US), Risk and Financial Advisory

Craig Brown

Partner (US), Risk and Financial Advisory

Asia

Brian Chan

Partner (HK), Banking & Capital Markets Audit and Assurance

James Polson

Partner (HK), Banking & Capital Markets Audit and Assurance

Lapman Lee

Partner (HK), Banking & Capital Markets Audit and Assurance

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