To address the challenges and risks associated with the LIBOR cessation, asset managers should continue to update their plans that were hopefully in place for the year-end transition, according to Chris Fedele, Vice President, Global Regulatory Strategy at Broadridge.
This includes ensuring a single project manager/LIBOR Transition Manager, who can reach across the entire organization and to third-party providers, is running 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 this 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 step on December 31, 2021, as most LIBOR settings were published for the final time.
USD LIBOR will continue to be published until June 30, 2023, according to the UK Financial Conduct Authority.
“We are truly only part of the way through the end of LIBOR as one of the most important dates for the U.S. Market is June 2023, when the remaining USD LIBOR tenors stop publishing,” Fedele stressed.
While many can breathe a sigh of relief after meeting their goals at the end of 2021, he said, now is not the time “to let down your guard”.
This means continuing your internal programs which identified LIBOR use, exposures, and related processes such as valuation across the institution, with a focus on the next milestone, he said.
“That should all 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 that clients are aware of the transition process and any impacts to LIBOR based product delivery.
Regulators have spent a significant amount of energy on ensuring that institutions who deal in LIBOR based products are aware of all the impacts to their processes, and all risks of this transition are communicated succinctly to their clients, he commented.
Another part of that same equation is further ensuring investment staff are well educated on the overall process, he said.
Fedele said this includes the full implications of the LIBOR transition to investment products, including an intimate familiarity with the alternative rates/product being provided.
“This “end-to-end” focus is imperative in minimizing any potential risk and exposures along the value chain and ultimately to clients,” he added.
He further said that for operations, this process starts with ensuring staff is 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 rates and update them accordingly.
This extends to the entire operations delivery cycle including third parties such as custodians, rate providers and broker-dealers, Fedele said.
“Vigilance is going to be a key to success, as many operations professionals in the industry have come to understand the potential impact may be very broad and risky,” he added.
When asked about the best way to transition away from LIBOR, Fedele said this depends on the products; investment vehicle or hedges being used.
“The regulatory guidance and the ARRC have been very precise with their recommendations for SOFR based alternatives/spreads. However, there are some situations where a SOFR based reference rate may not be appropriate,” he said.
“That is where the CSR’s (credit sensitive rates, e.g “Ameribor”) may come to play a role, especially since federal legislation that recently passed left the door open for their use,” he added.
According to Fedele, more than anything the current market impacts the phase-out by making the choice of a new rate even more critical.
“Spread is extremely important in this type of market, as is a certain level of predictability. We don’t have a lot of experience with either of those factors as it relates to the SOFR based rates. However, we have thus far seen some relative stability,” he said.
The regulators have been very clear about many of their expectations for the LIBOR transition, Fedele said.
“I suppose two words come to mind and they are: awareness and vigilance,” he said.
For some time now they have been focused on ensuring any market participants who deal in LIBOR based products are acutely aware of those exposures, identify the transition plan, and identify/report any related risks.
Federal legislation and accompanying, upcoming Federal Reserve guidance, should finally close many of the gaps on aspects such as “tough legacy” contracts and liability related to changing rates, Fedele said.
“By the way, it’s notable that many of the large shifts have not occurred quickly and only when participants are forced to do so. Food for thought…,” he concluded.
