December 31, 2021, LIBOR goes dark. Are you ready?
April 27, 2021
The LIBOR transition continues to present a thorny challenge for all concerned. Although the original timetable has shifted somewhat – with US regulators issuing supervisory guidance and requesting banks to cease entering into new contracts that use USD LIBOR by December 31, 2021, LIBOR as a benchmark rate is being phased out completed by June 30, 2023. Though many details remain unaddressed, and many firms may be tempted to “tap the brakes” on completing their transition, we recommend maintaining speed and staying on course as the clock continues to tick.
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The bifurcated timeline allows organizations to complete their original post-transition enhancements which in many cases included innovating products with other alternative reference rates (ARRs) beyond the secured overnight financing rate (SOFR or the benchmark rate that is essentially replacing LIBOR). This can result in a better product fit and provide clients with products that match up with their relative size and sophistication. For example, smaller clients may not have the technology to readily accept complex new products, or their technology estates may require much remediation, but can accept the new products with quick fixes.
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“For CFOs, the LIBOR transition creates a balancing act they need to navigate with the help of their COO and CIO peers.”
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We anticipate the transition to be especially challenging for CFOs, who are often at the center of a web of connected transactions. The situation is further compounded as CFOs manage through important revenue and cost challenges stemming from the pandemic crisis. CFOs need to protect the enterprise while developing new ways to create value. The LIBOR transition can actually help CFOs do this if they prepare themselves and their organizations properly. To implement a smooth transition, CFOs should be thinking not just of the role of the finance and accounting functions (the traditional “first line of defense” in risk management), but also of their regulatory reporting and control systems (the second line of defense).
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For CFOs, this might be viewed as a three-step process:
- First, assess and evaluate the risks involved in the transition.
- Second, look at other strategic initiatives, either in progress or in planning, and assess how best to make required changes to infrastructure and controls.
- Third, gauge the resiliency and change capacity of the organization as a whole; can it “dual operate”, (that is, run both new SOFR rates and legacy products simultaneously, at least through December 31, 2021) and do the costs of dual operation outrun the risks and uncertainties associated with a one-time changeover?
Moreover, CFOs of financial institutions have to make sure that both the originating side and the customer side of the organization are ready and coordinated. Our 2020 LIBOR survey showed that the financial and operational risk from adopting new interest rate curves and preparing for new ARR financing is far-reaching. CFOs, for example, should be developing scenarios to understand the potential impact of the transition upon cash, treasury, and funding functions. Accenture has developed its own benchmarking tool to compare banks’ LIBOR transition readiness to peer organization across all three lines of defense.
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Technology is another major concern for CFOs. Emerging technologies including automation, artificial intelligence, and distributed ledger (blockchain) can support the transition. These can also be useful post-transition, but there is significant lead time to get them up and running.
People with the right skills to help in the transition are scarce. Whether the plan is to staff internally, to draw upon outside resources, or to do both, CFOs should make sure that they have access to the skills needed across business lines and functions.
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“Only 53% of our 2020 LIBOR survey respondents were confident they had the necessary talent and capabilities to complete the transition on time.”
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In our view, it is not the time for CFOs to tap the brakes, or even to ease up on the gas pedal. The LIBOR transition is real, and it is happening. Time is growing short, resources are becoming scarce, and the changes required should not be underestimated. We should start seeing winners and losers in the transition as early as January 2022, so CFOs should stay focused and continue to make sure that everything related to the transition not only gets done, but gets done properly.
See more finance insights here and more LIBOR-focused material here.
