August 10, 2022

Buy Side urged to prepare for Libor end date

Chris Fedele

To address the challenges and risks associated with the termination of LIBOR, asset managers should continue to update their plans that hopefully were in place for the year-end transition, according to Chris Fedele, vice -President, Global Regulatory Strategy at Broadridge.

This involves ensuring that a single project manager/LIBOR transition manager, who can reach out to the entire organization and third-party vendors, manages the process, he said.

“This project should cover all potential end-to-end exposures and uses of LIBOR and include a detailed plan for their transition/testing,” he told Traders Magazine.

Not only is it wise to minimize your organization’s exposure, but it could also be a potential artifact for regulatory/audit inspection, he added.

The transition away from LIBOR reached a critical milestone on December 31, 2021, as most LIBOR parameters were last published.

USD LIBOR will continue to be published until June 30, 2023, according to the UK Financial Conduct Authority.

“We are really only part of the way to the end of LIBOR, because one of the most important dates for the US market is June 2023, when the remaining USD LIBOR tenors will stop publishing,” Fedele pointed out.

While many may breathe a sigh of relief after hitting their goals at the end of 2021, he said, now is not the time to “let our guard down”.

This means continuing your internal programs that have identified the use of LIBOR, exposures and related processes such as valuation across the institution, with a focus on the next step, he said. declared.

“All of this should be leveraged, once again, to get us across the finish line,” he said.

Fedele said that for investments, much of the focus has been on ensuring clients are aware of the transition process and any impact on the delivery of LIBOR-based products.

Regulators have spent considerable energy ensuring that institutions trading LIBOR-based products are aware of all impacts on their processes, and that all risks of this transition are succinctly communicated to their clients, a- he commented.

Another part of that same equation is making sure investment staff are knowledgeable about the overall process, he said.

Fedele said this includes all the implications of the transition from LIBOR to investment products, including an intimate knowledge of the alternative rates/products provided.

“This ‘end-to-end’ focus is imperative to minimize any potential risk and exposure throughout the value chain and ultimately to customers,” he added.

He added that for operations, this process starts with ensuring that staff are aware of all LIBOR exposures – from what is in the portfolio, to all processes using LIBOR in their calculations, modeling and other operational aspects such as how/where to obtain new tariffs and update them accordingly.

This extends to the entire trade delivery cycle, including third parties such as custodians, rate providers and brokers, Fedele said.

“Vigilance will be key to success, as many operations professionals in the sector have realized that the potential impact could be very wide and risky,” he added.

Asked how best to move away from LIBOR, Fedele said it depends on the products; investment or hedging vehicle used.

“Regulatory guidelines and the ARRC have been very specific with their recommendations for SOFR-based alternatives/spreads. However, there are certain situations where a reference rate based on SOFR may not be appropriate,” he said.

“This is where CSRs (credit-sensitive rates, e.g., ‘Ameribor’) can play a role, especially since recently passed federal legislation has left the door open for their use,” he said. added.

According to Fedele, more than anything, the current market is impacting phasing out by making choosing a new rate even more critical.

“Spread is extremely important in this type of market, as is some level of predictability. We don’t have a lot of experience with either of these factors when it comes to SOFR-based rates. However, so far we have seen relative stability,” he said.

Regulators have been very clear about many of their expectations for the LIBOR transition, Fedele said.

“I guess two words come to mind and they are: awareness and vigilance,” he said.

They have been working for some time to ensure that all market participants trading LIBOR-based products are fully aware of these exposures, identify the transition plan, and identify/report any associated risk.

Federal legislation and the upcoming Federal Reserve guidance that comes with it should finally close many of the loopholes on things like “hard” contracts and liability for rate moves, Fedele said.

“By the way, it’s worth noting that many of the big changes didn’t happen quickly and only when participants were forced to. Food for thought…”, he concluded.