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Industry roundup: 1 April

Sterling LIBOR no longer used in new lending or cash products maturing after 2021

As of today, April 1, sterling LIBOR is no longer to be used in any new lending or other cash products that mature after the end of 2021. This marks a key milestone in the replacement of the sterling LIBOR benchmark rate with alternative, risk-free reference rates by the end of this year. A statement from Capco says that the industry faces many challenges to ensure it can transition in time, including the following:

  • A lack of OTC liquidity.
  • A lack of exchange-traded/listed liquidity.
  • A lack of agreed market convention for loans and derivatives.
  • A lack of agreement on fallback methodology.
  • Hedging uncertainty and accounting standards with new RFRs.
  • Volatility and negative interest rates for RFRs

“The big headache for firms facing these challenges is prioritisation - many are simply not clear where they should be devoting their time and money," said Murray Longton, principal consultant at Capco. "That headache is further compounded by concerns about spending or investing too soon - if one element does not transition as planned, the demand for products in the market will subsequently remain low, suppressing the generation of liquidity. Firms are then burdened with running dual front-to-back systems for both LIBOR and non-LIBOR instruments.

Negative interest rates have also provided a challenge to the industry, as they impact various features of credit instruments and the related agreements between borrowers, lenders and loan/swap participants. Traditionally, risk models and risk appetite frameworks have not considered the ‘how’ of factoring in negative rates. Low rates complicate the assessment of the riskiness of loans, specifically those that hold IBORs. Low interest rates have already put immense stress on the CLO market - something that became clear last year when three-month LIBOR tenors went below 1%.

“This becomes a serious problem when the majority of CLO tranches do not have any floor thresholds," Longton said. "If we are to see spread rates fall below zero, debt holders would actually owe money to their issuers - and the industry cannot handle such a reversal in cash flow. I’d expect that by year-end these challenges will really begin to bite, and firms should be prepping to take the necessary steps – and precautions – to ensure that they can address the issues that will arise in the short term."


Nacha names the 2020 Top 50 financial institution ACH originators and receivers

Nacha has released its top 50 rankings of financial institution originators and receivers of ACH payments for 2020. The Top 50 originating financial institutions handled ACH volume of almost 23.1 billion payments last year, an increase of nearly 8.6% over 2019. They accounted for 92.7% of total commercial payments volume on the ACH Network.

Among receiving financial institutions, the Top 50 recorded ACH payment volume of 16.4 billion. That’s a nearly 11% increase from 2020, with those on the list accounting for 61.2% of total ACH Network volume, including payments received from the federal government.

In terms of the top ACH originators, Wells Fargo led the way with a total of 7.23 billion debits and credits originated. This was an increase in ACH origination activity of 12.3% year-on-year for the institution. They were followed by J.P. Morgan Chase (4.21 billion ACH originations, up 5.1%), Bank of America (2.67 billion ACH originations, down 2.6%), Citigroup (1.17 billion ACH originations, up 1.4%), and Capital One (918 million ACH originations, up 17.9% on the previous year).

Bank of America tops the list of ACH receivers in 2020. BofA received 2.85 billion ACH debits and credits last year, up 10.9% from 2019. They were followed by J.P. Morgan Chase (who received 2.64 billion ACH transactions, up 13.4% on 2019), Wells Fargo (2.19 billion, up 10.2%), PNC Financial Services Group (829 million, up 4.9%), and U.S. Bancorp (759 million, up 8.5%).

“The volume increases in ACH payments in 2020 by banks and credit unions are truly remarkable given the challenges posed by the pandemic,” said Michael Herd, senior vice president, ACH Network Administration at Nacha.

Additionally, Nacha reported nearly 4.3 billion “off-Network” ACH payments last year. These are primarily “on-us” ACH payments in which the originating and receiving financial institution are the same, and so are not submitted to an ACH Operator. Including these off-Network payments, 2020’s total ACH payment volume was 31.1 billion, an increase of 8.1% from 2019.


ICC aims to address SME trade finance gap

ICC Secretary General John Denton has announced a partnership with TradeFlow Capital Management that aims to help lay the foundations for the upcoming launch of ICC TRADENOW, a global campaign through which ICC will connect SMEs to trade finance solutions through tailored partnerships with digital solution providers.

The digitisation of trade finance and technology solutions offer new opportunities for banks and non-bank financiers to serve SMEs more effectively. As the institutional representative of 45 million businesses in 100 countries, ICC says it is in a unique position to help scale up innovative trade finance solutions by connecting financial service providers to our global network. 

Earlier this month, the ICC announced plans to build the online financing marketplace ICC TRADECOMM, to be powered by Finastra. Through this second partnership with TradeFlow Capital Management, the ICC says it will provide a complementary solution targeted at SMEs active in bulk commodities markets. 

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