The final countdown for LIBOR is rapidly approaching
Effective January 1, 2022, financial institutions will not be able to issue new loans based on London Interbank Offered Rate (LIBOR), a base rate for large global banks for short-term lending in the global interbank market. However, some companies intend to close the last transaction by then, in addition to having the ability to reference LIBOR for debt issued before the year-end deadline through June 2023.
In 2017, the financial industry regulatory authorities decided to revoke LIBOR after major banks’ traders manipulated interest rates higher or lower and fabricated key data information. Subsequently, banks paid billions of dollars in fines, and several traders were imprisoned. Since then, lenders have been placed under a considerable amount of pressure from regulators to reduce their exposure to LIBOR and their customers' exposure.
Strong investor demand for low interest rates and high bond yields has led to record sales of higher risk corporate bonds associated with LIBOR, which has always been appealing dating back to 1986. For example, private equity firms use leveraged lending to finance acquisitions. According to S&P Global Market Intelligence’s LCD (a data provider), total leveraged loan revenues reached over USD $585 billion YTD November 2021, an increase from USD $288 billion in November 2020.
According to analysts, many corporations are planning to move to the Secured Overnight Financing Rate (sofrrate.com), an alternative to LIBOR, while others are reviewing credit-sensitive options, similar to LIBOR, reflecting the lender’s funding costs, such as the Bloomberg Short-Term Bank Yield Index and Ameribor.
Amol Dhargalkar, Managing Partner and Head of Global Corporate Social Responsibility, Chatham Financial Corp, a financial risk advisor, stated that most companies will need to allocate additional workforce and funding to update their corporate treasury systems for handling compound interest calculations because of SOFR.
Although, there are some new LIBOR activities expected towards the end of the year, SOFR's progress is building momentum according to Tom Wipf, head of the Alternative Reference Rates Committee, Morgan Stanley.
In addition, many US companies have refused to move from LIBOR. However, according to S&P Global Market Intelligence’s LCD, about USD $10 billion worth of unused corporate loans sold this year were associated with SOFR (1.7% of this year's total revenues valued at USD $ 595 billion).
Mitchell Resnick, Senior Vice President and Treasurer, Walker & Dunlop Inc., the first US company to issue a leveraged loan associated with SOFR, commented that the transition from LIBOR to SOFR was seamless since their financial workers were familiar with the new reference rates due to the mortgage industry (Fannie Mae and Freddie Mac switched from LIBOR to SOFR in 2020).
Cloudwing and Finastra’s Fusion Summit create a state-of-the-art treasury solution in mainland China, Hong Kong & Macau
Hundsun Technologies Inc.’s subsidiary, CloudWing NetWork Technologies Co., Inc., a financial technology company headquartered in Hachzhou China, has acquired rights to Finastra’s Fusion Summit product and ledger business in mainland China, Hong Kong, and Macau, at the price of $65 million, www.asiafinancial.com. Finastra is an internationally renowned fintech company in the UK (www.finastra.com). The acquisition includes the franchise and exclusive license development rights of the Fusion Summit Business, a state-of-the-art treasury management solution used by large and medium-sized financial institutions to support operations in all business areas, including capital markets, currency markets, FX trading, and derivatives markets. Local banks in China will be able to strengthen both domestic and international opportunities using CloudWing Network’s treasury management solution (Fusion Summit), tailored specifically to China’s local requirements and market.
CloudWing’s procurement of the Fusion Summit system signals the move towards advancing their treasury management system to include large and medium-sized banks. Furthermore, the Fusion Summit system will be able to integrate Opics, CloudWing’s existing financial management system established for small and medium-sized banks. Therefore, CloudWing’s new treasury management system will leverage banks of all sizes to offer superior treasury solutions to a full range of banking customers. CloudWing will work together with Finastra’s product team to develop innovative product solutions on an ongoing basis.
Continued progression of advanced technologies into China’s local financial market will contribute to China’s independence and strategic vision in providing innovative solutions while meeting global regulations, commented Peng Zhenggang, Chairman, Hundsun Technologies.
There has been an increasing demand for market specific solutions in China while providing opportunities for banks to partner with local businesses, according to Eric Duffaut, President and Global Head of Customer Operations, Finastra. Since 2003, Duffaut stated their continued efforts into China’s market will help support local banks evolving in the digital transformation world.
The ever-evolving technological landscape of banks: Deutsche Bank perspective
As fintechs continue to market financial products to customers rapidly, banks are challenged with the enormous task of keeping up with innovative products while remaining compliant with regulations. Bernd Leukert, Chief Technology, Data and Innovation Officer, Deutsche Bank (DB), was hired in 2019 (formerly with SAP) to help simplify DB’s global technology operations into a more streamlined and cost-effective process.
Leukert commented how new fintechs have been rapidly sprouting up everywhere, bringing their financial products to market by putting together a collection of cloud services and building apps to serve consumers and businesses in similar ways to traditional banks. He further explained why banks are not able to move into cloud technology as quickly as start-up fintechs. One reason is, for example, the fact that government-regulated European banks need to comply with data sovereignty requirements that prevent certain sensitive financial data from being transferred to the public cloud. A solution for DB, since it is not able to transition to a public cloud, is state-of-the-art cloud services provided to banks' own data centres (which contain critical financial data) utilizing Oracle Exadata Cloud@Customer program, stated Leukert. Furthermore, Deutsche Bank not only benefits from a private cloud environment, but also simplifies the database environment, meets data regulatory requirements, and minimizes costs.
According to Oracle, the development to improve the Exadata database machines has been in the works for over ten years to provide superior workload platforms. Combining the hardware and software (the basis for Exadata Cloud@Customer) enables an organization to access the Exadata system in customers' data centres, with all the benefits of Oracle's public cloud infrastructure. Enterprises use services as if they were accessing Oracle Cloud, achieving the same simplicity, agility, and pay-per-use pricing according to Leukert. In addition, Deutsche Bank has the flexibility to quickly adapt and expand critical services and achieve greater data insights.
The majority of Deutsche Bank's applications run on Oracle databases that store more than 40 petabytes of data, making Exadata Cloud@Customer an attractive simplified option for moving these workloads to the cloud. Oracle further commented about the technical challenges other cloud providers experience in seeking to offer similar on-premises versions such as Oracle’s Exadata cloud version.
The development process has taken over ten years to build and improve, which can be attributed to the challenge. With Exadata, companies are able to meet their company guidelines, control data regulations, and provide flexibility to manage system variations easily while focusing on strategic company activities. Leukert further expressed how data is the basis for how DB manages its operations, anticipates customer needs, and develops new products and services.
Digital and paperless trade finance solution: DBS Bank India (DBS) continues digital transformation
DBS Bank India’s domestic trade finance, a financial services group in Asia, uses Electronic Invoice Verification (Eway) to digitize and simplify trade transactions. DBS India has launched a paperless solution to fund domestic invoices for buyers and sellers. Banks are now able to digitally verify Eway invoices (that is, evidence of movement of goods) to determine the authenticity of the underlying commercial transaction. This method enables DBS to process transactions faster without retrieving the underlying physical document.
An important milestone in the path of digital transformation is sown by the first paperless domestic trade finance between DBS and Lincon Polymers Pvt. Co., Ltd. Typically, banks are required to process tedious documentation. However, with these new solutions, customers can share transaction details through IDEAL, a DBS digital banking platform that enables businesses to initiate, monitor and protect business transactions, making the entire financial process run more smoothly and paperlessly. DBS’s partnership with Rezofin, an online invoice financing platform, enables the data, after receipt of a one-time authentication from the customer, to be validated against the government-enabled Eway bill portal via GSTN.
The Eway bill verification assists clients in reducing the “document-intensive” time taken for financing an invoice, stated Divyesh Dalal, MD & Head - Global Transaction Services, DBS Bank India. DBS’s flexible solutions to lessen the requirement to submit physical documents and ability to easily make financial requests has been a substantial improvement in Lincon Poylmer’s daily processes, commented Anish Shah, Finance Manager, Lincon Polymers Pvt. Ltd.
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