TV PANEL SUMMARY
Are you ready for the LIBOR-less era?
LIBOR is the cornerstone of today’s financial services, affecting possibly as much as US$350 trillion worth of financial products, but it’s days are numbered. Alongside all other interbank offered rates (IBORs) products, the London benchmark is due to be discontinued by the end of 2021. That may seem far away but, as panellists on MoneyLIVE’s recent Are You Ready For The Libor-less Era? webinar agreed, the magnitude of the change and the potential financial impact across a vast array of financial products and services means anyone affected needs to start working on the transition as soon as possible.
While the IBOR manipulation scandal is now history, the resulting slowdown in unsecured debt market activity has led global regulators to decide LIBOR is no longer fit for purpose, with three-month US dollar LIBOR, the most heavily referenced IBOR benchmark, supported by less than US$1 billion in transactions per day.
“There were only £187 million in deposits per day referencing three-month LIBOR across the whole of 2017,” said Steven Hurley, Head of Operations at Investment Banking Investec. “That’s not enough volume to be considered a liquid benchmark.”
“The operational implications are huge”
This transition from LIBOR and other IBORs to alternate reference rates – SOFR in the US, SONIA in the UK – is a huge undertaking. “It’s the size and scale that stands out,” said Andy Champion, Vice President, Enterprise Sales EMEA at DocuSign. “When Lehmans went bankrupt back in 2008, it was estimated they were involved with around 900,000 derivatives. LIBOR and other IBORS absolutely dwarf that and the operational implications are huge.”
“It’s a huge disruption. I have been in this sector for close to 25 years and this is the largest change since the introduction of the Euro currency in 1999.”
“It’s a huge disruption,” agreed Steven Hurley of Investec. “I have been in this sector for close to 25 years and this is the largest change since the introduction of the Euro currency in 1999.”
“It’s important to work in cross-functional teams because this is a problem that cuts across every area of operations”
There are few areas of a business that won’t be impacted by this change. “It’s important to work in cross-functional teams because this is a problem that cuts across every area of operations,” said Andrew Dickinson, Programme Director – Legal Transformation at Barclays. “It’s legal, compliance, business, operations. It’s critical we are all on the same page and working on the same schedules.”
“If you can do it now, then do it. It means there will be more resources to deal with any problems after 2021”
John Grout, an independent member of the LIBOR Oversight Committee, said it’s essential companies start work now, not just because of the scale of the task but because resources to tackle this will become scarcer as the December 2021 deadline approaches. “If you can do it now, then do it,” he said. “It means there will be more resources to deal with any problems after 2021.”
Identify your exposure
For more than four decades IBORs, especially LIBOR, underpinned the worldwide trade in financial products, from bonds and loans to derivatives and mortgage-backed securities. They are so embedded in the daily life of the global financial services industry that for many organisations – both financials and non-financials – the biggest challenge will be identifying their exposure. The scale of this cannot be under-estimated, particularly for those that have been involved in M&A activity or have multiple jurisdictions.
“When it comes to small companies and emerging economies, the question has to be, has anyone talked to them about this?”
John Grout of the LIBOR Oversight Committee said that while many banks and large corporates are on top of this issue, there are real concerns about smaller companies and those in emerging economies. “For non-financials, many contracts are rarely kept centrally so does anyone even know where those files are?” he pointed out. “The people who may once have known may have left. And when it comes to small companies and emerging economies, the question has to be, has anyone talked to them about this?”
Even with financial services organisations, a lack of definitive regulatory guidance has seen some take a “wait-and-see” approach. Steven Hurley at Investec, for example, said the bank had been waiting for further detail to give accurate and up-to-date information to clients. “We need to be client-centric and communicate at the right time with information that does not confuse them,” he said.
“This work has to be happening now”
He pointed out that the January 2020 working group paper from the FCA and Bank of England had provided some clearer direction. “Cash products cannot be offered based on LIBOR rates from the end of Q3 2020 so you have to be ready to offer new products by that time,” said Hurley. “This work has to be happening now.”
“AI can surface the intelligence so that the cross-functional teams can make informed decisions and prioritise where to take action”
With the months quickly ticking down, organisations are urged to embrace technology that can do a lot of the heavy lifting at a speed and scale manual teams can’t match. Andy Champion of Docusign said his company was seeing “very aggressive investment” in AI by the top ten global financial services firms. “AI can do an intelligent scan of these agreements and contracts at scale in a very cost-effective and time-efficient manner,” he said. “It can start surfacing the intelligence so that the cross-functional teams can make informed decisions and prioritise where to take action.”
The transition process
And the work doesn’t stop once companies identify their exposure. “The next step is interpreting that and advising the business on transition strategies to reduce execution risk,” said Andrew Dickinson of Barclays.
Here, again, technology will be key. “When it comes to the repapering process, you can use technology to give standardisation and model clauses so you have that consistency and control,” said Andy Champion of DocuSign, stressing the importance of generating an audit trail for compliance purposes.
“Over 90 per cent [of clients] see contracts signed and returned within 24 hours and 22 per cent see them executed in under 15 minutes…Small steps like this can reduce the operational overhead and allow you to redirect resources into some of the more nuanced and complicated areas.”
Champion said his company is seeing a lot of investment in digital signatures to streamline processes and accelerate the transition. “In the old world, the preparation, red-lining and signing of contracts could take many weeks,” he said. “Technology can take that down to days and hours. We support over 500,000 companies around the world and over 90 per cent are seeing contracts signed and returned within 24 hours and 22 per cent see them executed in under 15 minutes. Apply that to the scale of the problem here and you can see that small steps like this can reduce the operational overhead and allow you to redirect resources into some of the more nuanced and complicated areas.”
“The regulators have said they expect banks to deal fairly and avoid value transfer.”
This isn’t just a repapering exercise, however; banks need to have a strategy in place to manage financial and commercial risks.
“Once you’re found your exposure you need to work out how to transition from a LIBOR legacy loan to SONIA and how will that happen, in a one-day sudden death switch off or will there be a transition period?” said John Grout of the LIBOR Oversight Committee, who highlighted the reputational and litigational risks of getting this wrong “The regulators have said they expect banks to deal fairly and avoid value transfer.”
Of course, this isn’t the first time that organisations have had to undertake a change of this scale. “Over the last ten to twelve years, regulatory change has been a constant and the technology is changing faster than ever,” said Steven Hurley of Investec.
“One of the positives from all the legislative changes we’ve seen in recent years is that there’s a muscle memory and lessons learned along the way”
Andrew Dickinson of Barclays agreed. “One of the positives from all the legislative changes we’ve seen in recent years is that there’s a muscle memory and lessons learned along the way,” he said. “We have a unit that horizon scans legislation coming down the pipe and that plays into our business case right now, so that when we’re looking at our plans and talking about investment in infrastructure and software, we have that forward view to make sure the investment will help us be geared up and operate how we want to going forward.”
Andy Champion of DocuSign agreed that the investments made to handle the LIBOR transition will make organisations future-fit for ongoing digital disruption and regulatory upheaval.
“In the conversations we have with our clients, the consistent message is that the old legacy models of how we did things in the past are not how we want to do things in the future,” said Champion. “The financial services organisations globally that survive will be those that have nimble and flexible systems and procedures that allow them to handle change, whether it’s LIBOR or changing consumer expectations.
“The adoption of legal technology is having as big an impact on how we do stuff in the financial services world as the introduction of the iPhone”
“The adoption of legal technology is having as big an impact on how we do stuff in the financial services world as the introduction of the iPhone,” said Champion. “There are huge opportunities for those organisations that invest wisely to help them adjust and adapt not just to the uncertainty around LIBOR but to future transitions that you do not yet even know will be coming down the line.”
With the LIBOR cut-off less than 24 months away, and the true scale of the challenge yet to be revealed, banks need to start work now and embrace technologies that will speed the transition, making them fit for a LIBOR-less future, whatever it may hold.
Watch the full on-demand recording of the discussion here.
WEBINAR PRODUCED IN PARTNERSHIP WITH
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