As such, a wide range of models will need to be redeveloped, recalibrated and revalidated as a result of transition to ARR. The lack of a historical sequence and asymmetry in the timing of transition across products luno exchange review and linked contracts may result in additional risk for firms. The lack of definitive regulatory guidance on the IBOR transition may slow down progress as banks deem “wait and watch” to be the most prudent strategy.
- The purpose of this newsletter is to provide the latest updates and industry developments regarding the transition from IBORs to alternative nearly risk-free rates (RFRs).
- At a time when costs are rising and margins are being squeezed, outsourcing is often the most efficient option for investment firms during this difficult period.
- Alternative Reference Rate Committee (ARRC)
The ARRC was convened in 2014 by the Federal Reserve to identify alternative reference rates to replace USD LIBOR and recommended the Secured Overnight Financing Rate (SOFR) as it preferred alternative rate.
- This timing allows existing LIBOR contracts to mature or be modified to an alternative rate before LIBOR becomes unavailable.
CARR has decided to enhance an existing rate, the Canadian Overnight Repo Rate Average (CORRA). While CARR has presented its recommendations, the decision to cease publication of CDOR ultimately lies with RBSL. Only a notice from RBSL announcing the cessation of CDOR would trigger the start of the CARR recommended stages of transition. The Canadian Overnight Repo Rate Average (CORRA) is a measure of the average cost of overnight secured funding. It is the trimmed median repo rate comprised of both inter-dealer and dealer-to-client trades where data can be obtained.
Following the financial crisis, the replacement of benchmark interest rates such as LIBOR and other interbank offered rates (‘IBORs’) has become a priority for global regulators. IBORs are interest rate benchmarks that underpin over US$350t in financial instruments and contracts globally. The transition away from IBORs to alternative nearly risk-free rates (RFRs) will impact financial institutions and market participants leading to significant client outreach, legal contract renegotiation, repapering and repricing of existing contracts. In 2017, the Financial Conduct Authority (FCA; the UK body that regulates LIBOR) declared that after 31 December 2021 it will no longer compel banks to continue making LIBOR submissions.
CFIF recommends path for winding down BA market
Bank of Canada, 16 October 2023
The Canadian Fixed-Income Forum recommends that Canadian banks begin tapering off their BA issuance starting in November 2023 to coincide with CARR’s “no new CDOR or BA loan” milestone. What you need is a platform capable of providing accurate, complete and timely data from one integrated platform. All this could be avoided with real-time, high-quality data that provides updates and relevant reporting across your organization around the globe.
Does your firm really have a global view of your positions and regulatory compliance?
Our Investment Book of Record (IBOR) integrates data across front, middle and back office ensuring you can gain a complete overview of your operations, while providing you with the reliable, event-adjusted and up-to-date positions data you need to make more informed investment decisions. By freeing up key resources to focus on the core of your business, SimCorp’s IBOR increases your potential to exploit new growth opportunities. Term RFRs provide an indicative, forward-looking measurement of RFR rates, based on market expectations implied from relevant RFR derivatives markets. They include expectations of future level of interest rates but do not include any interbank credit premium. The IBOR goes further, providing users with broader, more granular and real-time views of performance and risk data. They support performance returns at the individual position level, with updates applied to historical holdings or open periods.
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SOFR was recommended by ARRC as a replacement for USD LIBOR (versus alternative IBORs) on the basis of the depth of the underlying market and its likely robustness over time. SOFR is a broad measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, calculated by a volume- weighted median of this transaction-level data.
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It lacked the timeliness, context and accessibility necessary to support decision-making for the middle and front office. But today’s leading accounting systems function in real- or near real-time, aggregate data from internal and external systems, and provide robust reporting capabilities. To that end, the right accounting system can serve as an effective IBOR solution for mid- or smaller-size firms without the significant resources to implement and support a complex, dedicated solution. Working group on Euro Risk-Free Rates
The European Central Bank (ECB), the Belgian Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission launched a private sector working group on euro risk-free rates. The working group was tasked with identifying an alternative RFR to serve as a basis for an alternative to the current benchmarks used in a variety of financial instruments and contracts in the Euro area. The Working Group recommended €STR as its preferred nearly risk-free rate for the Euro area.
Term SOFR is based upon more than a trillion dollars in daily, reliably reported SOFR futures transaction volume. On March 5, 2021, ICE Benchmark Administration (IBA), the administrator of LIBOR, finalized its cessation plans and announced that most LIBOR settings would cease publication after December 31, 2021. The Federal Reserve Bank of New York’s (FRBNY) Alternative Reference Rates Committee (ARRC) recommended the Secured Overnight Financing Rate (SOFR) as its preferred RFR and endorsed the CME Term SOFR rates as the forward-looking index to replace USD LIBOR.
In addition, firms will need to update the fallback language for all contracts to address the potential risk of IBOR discontinuation. Market adoption and liquidity in ARR derivatives will be milestones for the transition plan. However, as the transition timing for cash products is likely to lag derivatives, the demand for ARR derivatives to hedge the potential interest rate risk embedded in loans and other cash products will also be delayed. Equally ARRs do not currently qualify as an eligible benchmark rate for hedge accounting, which may dampen the demand for ARR derivatives in the short term. That demand for data has really encouraged the service providers to move that outsource horizon up and move into that middle office. Today, firms must function as unified organizations with a single view of operations and be able to react to market changes quickly.
IBOR reform and financial reporting under IFRS
On June 30, 2023, the IBA will cease publication of all remaining USD LIBOR tenors (overnight, one month, three months and twelve months). This timing allows existing LIBOR contracts to mature or be modified to an alternative rate before LIBOR becomes unavailable. For long-date contracts, firms may need to renegotiate contract language to transition from IBOR to ARR. Unlike derivatives, which will be addressed in bulk through updates to standard contract language (protocol), cash products for corporate and retail end-users have limited standardization, or protocol.
As the ARR is not a direct replacement of the IBOR, our objective is to support clients to identify their IBOR specific challenges and define a roadmap for an orderly, efficient and coordinated transition. It really sits there at the heart of the asset manager’s operations to provide that information back into their front office to support their portfolio managers, and oversight for their operations. The vital thing about the IBOR is that it’s provider- or custodian-agnostic, so despite all the underlying back-office relationships that there may be, the IBOR acts as that central, consolidated record for the asset manager.
To assess the IBOR business case, asset managers should fully model the different transformation scenarios—vendor, proprietary technology or outsourcing. By analyzing each, they could not only derive the savings profile, but also the investment required. The ending of Interbank Offered Rates (IBORs) will likely lead to significant changes across a broad suite of financial products and markets. This page focuses on the implications of IBOR reform for financial reporting under IFRS. For further information on other aspects of IBOR replacement, visit our LIBOR reference rate and reform insights page.
But for smaller firms, expanding the use of the ABOR to achieve similar results makes better sense. IBOR leverages a number of data feeds, including market data feeds (e.g. Bloomberg, Refinitiv), counterparty feeds (e.g. custodians, prime brokers, https://forex-review.net/ fund administrators) and trading feeds (i.e. FIX connections to trading venues or EMS). Instead of using a similar rate for both legs of an FX swap, as is the case with IBOR, different ARRs will be used for each leg of a transaction.
To mitigate the uncertainty, firms will need to determine the appropriate spreads to be applied to ARRs ahead of the transition, requiring the recalibration of a wide range of financial and risk models. Both the UK and US plan to phase out IBOR and move to a new benchmark – known as alternate reference rates (ARR) – by the end of 2021. What Firms Should Start Thinking About
Despite industry efforts to guide market participants in this transition, individual firms will need to make their own plans for the transition. Key areas impacted by the transition include project governance/ management, exposure and impact analysis, risk management, contractual remediation and infrastructure/ technology readiness. Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), are the rates at which banks can borrow in the interbank market on an unsecured basis.
How do we make sure that the front office has the data that helps enrich their investment decision process? So having the subscription and redemption data coming in intraday that allows them to make those investment decisions based on the latest information available. Not waiting till the next day until that data comes through an overnight batch or a NAV being produced. And then in terms of, actually, when you are looking at an IBOR, that challenge is really coming from, how do you get those multiple sources and systems to build that single IBOR view and make sure that that data’s accurate? So having controls around that data to be comfortable that that data that’s feeding the front office, that investment decisions being made are accurate. ARRC September 26 Meeting Readout
Alternative Reference Rates Committee, 26 September 2023
The Operations/Infrastructure Working Group reported that usage of the DTCC LIBOR Replacement Index Communication Tool has been smooth.
According to Broadridge, global Assets under Management (AuM) fell by 13% in 2022 to $96 trillion, making it the largest single-year decrease in the last ten years. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.