After more than 40 years of using interbank offered rates as reference rates for variable-rate financial instruments and other commercial and consumer contracts, initiatives have begun to transition to alternative reference rates. The effects of this transition will be wide-ranging and significant for all kinds of financial activity. Therefore, EY recommends its clients to act quickly in conducting an impact assessment and defining a transition plan. Author: Simon Woods
Interbank offered rates (IBORs) are deeply embedded in a broad range of financial activities. IBORs serve as reference rates for financial instruments and other commercial and consumer contracts worth several hundred trillion US dollars and are hardwired into valuation and other systems. However, IBORs are no longer deemed to be a desirable benchmark due to low transaction volumes in the unsecured interbank funding markets that underpin the IBOR panel banks’ submissions. Following the announcement of the UK Financial Conduct Authority that it intends to no longer encourage or compel banks to provide quotes beyond 2021, the publication of LIBOR after 2021 cannot be guaranteed. Moreover, Euro Overnight Index Average (EONIA) and Euro Interbank Offered Rate (EURIBOR) are not currently compliant with the European Benchmark Regulation and thus cannot be used in their present form after 1 January 2020.
IBOR transition began with the publication of alternative reference rates (ARRs) in four major currencies.
Discussions with leading Swiss industry experts resulted in the following key takeaways:
- IBOR transition impacts the entire organization across all business processes, functions and IT.
- Governance is key and any transition plan needs senior sponsorship, clear objectives and appropriate resources. Therefore, it is important that there is discussion and education at the executive board level.
- 25% of surveyed participants have already started an impact assessment, while 47% have initiated internal discussions and education at the executive level.
Transitioning away from IBORs to the ARRs will impact a broad range of products and contracts in all financial activities and almost all functional areas. Since the transition will be complex and will take time to implement, institutions need to mobilize now to understand the impact on their business, on their clients, and form transition plans.