There is no doubt that global financial markets need ‘Risk-Free’ rates. All LIBOR replacements are now operational and slowly establishing liquidity to back them up. But for corporates moving the new RF rates takes time and a huge amount of work, e.g. ABP took over two years to move their book from LIBOR to SONIA as they first had to get board approval on the project and then on the impact of the move to the new rate, and change all their internal systems and their TMS, see*. The other major problem is that there are still several key ‘Not Known’ aspects with the new RF rates.
Corporates need a methodology to follow that will ensure that the transition to the new rates as easily and as risk-free as possible. Pepijn Sigtermans, COO Group Treasury at ING Bank, recommends that corporates should start preparing now, there is no time to waste. Then he recommends this NO-REGRETS methodology:
- Take stock of what and where your company/group use LIBOR both domestically and internationally
- Carry out a risk assessment of the products/services and processes that you use, what are the development plans, and what changes are needed to use the new RF rates
- Create a NO-REGRETS heat map of the priorities of what need to do and when
- Re-assess this NO-REGRETS heat map regularly as things change and ‘Not-Knowns’ become ‘Knowns’.
ING is actively involved in the identification of the new RF rates – ING chairs the industry Working Group on Euro Risk-Free Rates that was initiated by the ECB, ESMA and European Commission with the task to recommend on a replacement for EONIA and a fallback to EURIBOR. At EuroFinance Conference last month, Sigtermans listed the next steps that the working groups in various jurisdictions need to carry out to find suitable LIBOR replacements and EURIBOR fallbacks:
- Recommend backwards and forward-looking methodologies
- Recommend credit spread methodologies
- Analyse the impact on systems and infrastructure
- Analyse the impact on risk management and financial accounting
- Recommend on legal language for new and legacy contracts referencing current IBORs
- Communicate/educate on recommendations done.
No wonder ING are briefing their corporate clients regularly on what is happening as to what is Known and what is Not Known so that they able to re-assess their NO-REGRETS heat map.
For future development, a question is emerging as to whether corporates should aim to use one replacement rate or should they just accept the five different rates and any new ones that will emerge? Sigtermans believes that “There are too many uncertainties as to what will happen to predict this for sure, working groups work together to find a certain alignment, however, it all depends on local markets as to which replacement is most suitable. What I do know is that corporates need to start preparing now to be ready in time once certainty on the recommended LIBOR replacements and EURIBOR fallbacks is there.”
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