Since July 2017, the financial industry has been preparing for a world without the London Interbank Offered Rate (LIBOR) and other IBORs. This is because global regulators deemed them no longer “fit for purpose” to be the plumbing of the financial markets. Regulators and market participants worldwide are diligently working on solutions to transition from IBORs to alternative reference rates but there is a race against time and there is plenty still left to do.
In this report, we provide a framework that RBC has used in mobilizing our IBOR program and we think that such an approach could be useful to our clients in developing their own programs as they look to transition.
Summary of IBOR Program Priorities
1. IBOR Contract Inventory and Exposure Assessment
Understand exposures to LIBOR and other IBORs in your portfolio, including exposures to derivatives, loans, bonds and other financial contracts; review and create and inventory of contracts referencing LIBOR or another IBOR.
2. Review of Contractual Terms
Review contractual terms to determine fallbacks if LIBOR or another IBOR temporarily or permanently discontinues. Clients may wish to consider renegotiating these contracts with the assistance of their own advisors (including tax, legal and financial), to the extent necessary.
3. Contract Renegotiation
Prepare to re-negotiate impacted contracts, if necessary. IBORs and their replacement rates (i.e. RFRs) are not economically the same; contractual adjustments may need to be made to contracts to minimize value transfer from one party to another as a result of the transition.
4. IBOR Exposure Reduction Considerations
Consider reducing IBOR exposures by transitioning to RFR products. In parallel with the work noted above on legacy transactions, we encourage clients to keep up-to-date on product offerings with respect to RFR products.
5. Infrastructure/Systems Changes
Investments to infrastructure, including technology and data systems may also be needed. We encourage clients to take a thoughtful approach towards infrastructure and analytics, processing of RFR products, treasury and risk management systems to identify what changes or updates may be required.
6. Treasury Processes Considerations
Consider issues related to tax, accounting (including hedge accounting) and corporate treasury issues (funds transfer pricing) particularly if valuation changes are anticipated as a result of the transition from IBORs to RFRs.
This report also covers the basics and provides an overview of IBORs and RFRs and concludes with an overview of the challenges the market is facing in the transition. RBC is truly committed to benchmark reform with a global staff that is solution oriented.