A Nordic Perspective
Firms are generally well progressed when it comes to LIBOR — however, for local currencies, questions remain on what will happen to the existing IBOR; how this will relate to the new RFR; and, in turn, what this will mean for related products. Now is the time to act. The transition will not disappear; it's only foreseen to become more disorderly and will impact other initiatives, if not dealt with properly.
Following on from our 2021 regulatory outlook, this report will dive into the IBOR transition from a Nordic perspective to outline areas of focus, guide you through the status of the Nordic currencies and highlight how the transition impacts Nordic banks.
BACKGROUND In 2013, the G20 asked the Financial Stability Board (FSB) to undertake a fundamental review of major interest rate benchmarks. This work led to the recognition that, even after reforms that strengthened the underlying processes, certain risks relating to robustness and reliability of IBORs could not be fully addressed.
In 2017, the Financial Conduct Authority (FCA), the UK body that regulates LIBOR, declared that after 31 December 2021 it will no longer compel banks to continue making LIBOR submissions. As a result, the number of submissions could fall significantly, reducing the representativeness of LIBOR or causing LIBOR publication to cease entirely. The FCA's statement triggered what is now known as the IBOR Transition.
LIBOR (GBP, USD, JPY, CHF and EUR) and other IBORs (NIBOR, STIBOR, CIBOR etc.) are deeply entrenched in financial firms’ contracts, processes and data. The rate is so embedded in day-to-day financial service activities that even identifying a firm’s exposures to it—which is just one element of what is needed to transition successfully—is a highly complex task.
Firms need to move away from IBORs to using the more robust and transaction-based risk-free rates (“RFRs”)
Deadlines for activities differ by currency; however, for LIBOR, countries are pushing to end the reliance on LIBOR for new activity at least by the end of 2021.
LIBOR transition is most pressing for banks with LIBOR exposure due to the imminent deadlines; however, IBOR Transition covers more than just LIBOR. For example, the BMR requires all contracts using reference rates to include fallback language to cover the event of an IBOR cessation, which also implies that banks must be operationally ready to use RFRs in their systems and processes, even if the IBOR will continue into 2022 and beyond.
The risks of a poorly managed transition are business critical, with possible consequences including:
• Inability to serve clients in the market
• Drop in revenues
• Compliance and reputation risk
• Inadequate risk management and accounting
• Unforeseen operational and system impacts
Although regulatory deadlines have been shifting, the change to these fundamental numbers should not be underestimated. There are interim milestones to reach over the coming years that require attention from across the business, for example, how will firms handle and integrate the new overnight rates into operations and products. Download our report here.