LIBOR Replacement and the way forward

Why do Treasures care?

IBORs are the standard reference benchmarks for millions of contracts worldwide. According to an estimate by Bloomberg, the estimated market value of the underlying contracts is over USD 370 trillion. Discontinuation of IBORs will impact almost every Treasury transaction of your organization regardless whether it is lending (deposits), borrowing (loans), investing (bonds) or a hedging (derivatives) transaction.

Implementation of ARRs will have an impact on the valuation of your existing transactions and pricing of new transactions. Changes in benchmarks will further change interest calculations, resulting cash flows and settlement dates. Changes in interest calculation methods might have impacts on your taxation as there could be changes to your debt instrument value. Resulting changes in accounting methods used for ARRs pose another challenge. In addition to financial impacts, your system infrastructure will be affected due to the required implementation of ARRs.

What should Treasurers do?

#01: Familiarize yourself with ARRs and related events especially fallback provisions of existing contracts

Fallback-Klausel:

Fallback provision:

The ECB defines ‘fallback provision’ as clauses in a contract that determine what rate parties should use in the event that the agreed upon benchmark rate like IBORs are not available.

Here is the list of major ARRs replacing current benchmarks along with their cessation deadlines:

*Only for 1-week and 2-month, the rest of USD LIBOR settings will be changed after 06/30/2023.

#02: Plan and prepare for the transition to ARRs.

Plan early to be prepared when IBORs are no longer available. Also note: The new instrument contracts issued are already quoted with ARRs.

#03: Identify your IBOR-based engagement and relevant transactions

Identify the number of transactions, the total value of the transactions, the currencies of the transactions, the type of transactions, the counterparties involved, and the fallback clauses involved.

#04: Talk to your financial business partners and, if possible, negotiate existing contracts

Once exposure is identified, speak with relevant financial partners, including banks and/or counterparties, to coordinate their post-IBOR plans and schedules with yours.

#05: Update your system landscape

Update your treasury management system (TMS) to support ARRs. Consult with your TMS vendor, as well as market data vendors, to understand what needs to be done to implement the required changes, expected timeline, and cost of implementation. Please note that some regulators require firms to be fully operational by December 31, 2021. The Swiss Financial Market Supervisory Authority (FINMA) requires “full operational readiness” in its December 2020 notice. Accordingly, all relevant systems and processes should already be able to function without dependence on LIBOR.”

SAP system adaptation

There is already a large number of SAP updates available for the new interest calculation methods for money market transactions and bonds. Even the new feature to include/exclude the spread into the compounding has been added to the solution. Updates for ABS/MBS and Sinking Bonds are not yet available and are expected around Q3 2021.

While the number of impacted instruments may not be large for some companies in 2021, ARRs are the new future convention and USD-LIBORs will follow in 2023. The above five steps should help your organization to understand and manage a smooth transition to ARRs.

We have already accompanied and consulted various clients regarding their IBORs replacement journey and are happy to help your organization.