Three quarters firms unprepared for Libor

Jennifer Press, managing director for alternative asset advisory services, Duff & Phelps.

More than three quarters of financial institutions lack a comprehensive plan for the LIBOR transition, which is due on 31 December, according to a survey from Duff & Phelps.

The report also found that over half or 54% of firms surveyed said they had identified LIBOR exposures but are yet to take any necessary action to resolve their liability.

Of that percentage, 58% had not catalogued transition provision, and 42% were unsure of what to do next.

Almost a quarter (23%) of the firms surveyed had not begun any formal processes to identify expsoures.

Only a third of respondents (34%) revealed a belief that they are on track, despite the stunted progress across the majority of the industry. However, there is a fear that this could indicate that firms are underestimating the extent and complexity of work required for a successful transition.

A similar number of firms (31%) had only just begun thinking about their transition and are unsure whether they are on track.

Meanwhile, 14% had not begun planning, with a further 14% concerned they will not be ready before at least the first quarter next year, three months after the cessation date.

Only 7% of firms predict they will be ready by the end of the first half 2021, well in advance of the deadline.

“It was quite surprising that nine months out from the deadline, houses with a comprehensive plan are in the minority,” said Jennifer Press, managing director for alternative asset advisory services at Duff & Phelps.

She added, that “the LIBOR transition is one of the greatest regulatory-driven changes ever, and inevitably it requires complex planning, thought and analysis.”

Marcus Morton, managing director, valuation services at Duff & Phelps, said, “The results indicate that although the majority of firms have identified their LIBOR exposures, many have yet to formally catalogue the transition provisions.”

He added, “There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate.

“It will pay in the long term to properly assess exposure of each and every contract, even if firms are under the impression fallback language is sufficient.”

Alexandre Bon, group co-head of Libor and benchmark reform at Murex, echoes these sentiments. “These findings reinforce the main challenge financial institutions are facing around adopting new products using the alternative reference rates but also managing the complex transition of legacy LIBOR referencing transactions, to alternative reference rate – be it through industry fallbacks or bespoke bilateral arrangements.

He adds, “What makes this so difficult is that it’s quite simply like replacing apples with oranges because, IBOR benchmarks and the new RFR’s or alternative reference rates, are fundamentally very different instruments.

“In addition, some technical issues have been under reported in the market so far. For instance, potential performance and stability issues for systems running complex risk calculations (VaR, XVA) once LIBOR positions get replaced by their heavier risk-free rate equivalents.”

©Markets Media Europe 2021

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