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Financial institutions turn attention to risks in a post IBOR climate

Publication Date: 20 May 2019 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav Sharma (Associate Editor ReachX)
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Equity Fundamental Thematic Multi Asset MENA EU ex-UK UK Financial Services

The expected replacement of interbank offered rates (IBORs) by alternative reference rates (ARRs) is bound the create risks and challenges aplenty for financial institutions, which is why most in the sector are factoring the changeover in their risk planning. 

Banks, insurance companies and asset managers are staring at financial, operational, legal, regulatory and technological risks from the discontinuation of IBORs in 2021.

Polling 76 financial institutions, rating agency Moody's found that three-quarters of banks and one-third of non-banking financial institutions (NBFIs) expect material risk in the move from IBORs to transaction-based overnight ARRs.

"Dangers include legal risks that clients and counterparties may not adhere to industry protocols, and operational risks that processes and systems will not be ready and will disrupt business," said Olivier Panis, Vice President and Senior Credit Officer at Moody's.

Most survey respondents considered the main challenges to be the term adjustment between IBORs and overnight rates, the lack of liquidity for alternative benchmarks and the changes in contractual language for loans, investments, liabilities and hedging instruments.

Very few banks and no surveyed NBFIs have issued debt using new benchmarks because liquidity is still very limited, the agency noted.

Around two-thirds of banks and one-third of NBFIs surveyed already have remedial transition plans. 

“Most banks and large NBFIs are active in working groups with regulators and industry associations, ensuring sharing of information among market participants and consistent integration of standards into contracts,” Panis concluded.  

In July 2017, the UK Financial Conduct Authority announced that it would not compel panel banks for the London Interbank Offered Rate (LIBOR) to make submissions after 2021, prompting a number of other global regulators to confirm that they will discontinue IBORs and replace them with transaction-based overnight ARRs. 

However, there is still much uncertainty on the final definition of benchmarks to be adopted after 2021 when IBORs disappear.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma (Associate Editor ReachX)

 

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