Where to next? The outlook for UK markets in a LIBOR- less world
The FCA, the Bank of England, and foreign authorities have now completed the final steps to phase out LIBOR, a trillion-pound interest rate benchmark used in a multitude of global financial transactions.
Firms have been encouraged to switch to new, risk-free LIBOR alternatives by the end of 2021. Commercial lending tied to SONIA, sterling’s new risk-free rate, has already surpassed £100 billion.
LIBOR, the scandal-plagued reference rate for trillions of dollars in mortgages, hedges, commercial loans, and other contracts around the world, has been a favourite benchmark for loans since the 1980s, so this is a significant technological adjustment for financial markets to make.
However, after the financial crisis of 2008, regulators began pressing for a phasing out of LIBOR due to growing credibility problems.
Most sterling legacy contracts had been migrated on or before December 31st, 2021, led by both banking and finance industry’s efforts.
However, there remains a small number of contracts that could not be modified before the deadline.
The Financial Services Act of 2021 and accompanying FCA regulation are the result of an extensive study to find and recommend a legal solution for these contracts. For many, securing this large safety net for most legacy LIBOR contracts after year-end was the final element in ensuring a seamless transition and avoiding a cliff edge scenario.
Key considerations for post cessation success
Just because the deadline has been reached, it does not mean that firms should forget about LIBOR altogether. Teams will speedily and effectively need to adopt post LIBOR practises into their everyday work processes. Some of the primary considerations include:
- Firms should ensure that their database has been fully updated so that computer systems detect the replacement rate connected to historical LIBOR contracts.
- Market participants will need to understand new debt quoting rules as well as new methods for valuing and measuring debt.
- When it comes to tough legacy contracts, firms will need to see if the loan has so-called fallback provisions and use legacy LIBOR exposure.
- Firms that hold derivatives should ideally have both a loan and its hedge tied to the same index, or the debt will no longer be perfectly hedged, calling into question certain accounting assumptions.
- When a loan is reset to a new index, certain accounting treatments may be triggered, which the Financial Accounting Standards Board appears to be on track to provide relief for until 2024. This proposal should be out for evaluation by the end of the second quarter of 2022 and finalised by the end of the year.
Getting post deadline efforts right, first time around, is critical
Regulators and governing bodies are extremely serious about the issuance of penalties and fines for those who have not fully transitioned to alternative reference rates. Even with a passed deadline, key areas of concern will need to be addressed and this regularly requires external expertise and resource.
As a global contingent resource specialist, Momenta can provide additional resources for the main areas of the post-LIBOR transition process, allowing your team and business to focus on the project’s strategic oversight while we assist you to put your vision into action.
This flexibility helps you to ensure that your team is constantly striking the appropriate balance, resulting in a more effective solution that benefits your end client’s results.
Throughout the post-LIBOR transition process, Momenta can provide fully built teams to support in all key disciplines, including:
- Identifying the contracts that need to be swapped
- Re-papering according to an appropriate index rate
- Reviewing fallback language
- Calculating the fluctuated pricing in each contract due to the new IBOR attached to any calculation or swap
- Contract negotiation and review
- Communications to the end customer regarding their new rates
Additional skilled and experienced resource will help you to avoid wasted time and help your clients transition their contracts to a new index on-time, efficiently, and effectively.
If you are looking to finalise transitional efforts, get in touch to see how we can help you achieve all your business’ LIBOR cessation goals.