The waiting game in the transition to LIBOR is dangerous
by Jack Large
Large corporate treasury department departments and companies around the world are struggling with the move from LIBOR to one of the new Risk-Free Reference Rates.
It is a critical year for LIBOR transition. As the BoE’s Financial Policy Committee (FPC) set out in December 2019, whilst good progress has been made, firms need to accelerate efforts to ensure they are prepared for LIBOR cessation by end-2021.
In the UK, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published its priorities and an updated roadmap for the year ahead to highlight important events and clarify actions market participants should take to reduce LIBOR exposure and transition to alternative rates, including:
- Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020.
- Throughout 2020, taking steps that demonstrate that compounded SONIA is easily accessible and usable.
- Take steps to enable a further shift of volumes from LIBOR to SONIA in derivative markets.
- Establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021.
- Considering how best to address issues ‘tough legacy’ contracts.
New LIBOR valuation products for banks are being announced, see, but many corporate treasury departments are starting to worry about the lack of progress.
What is actually happening
Many companies have not formulated a transition plan, they are waiting for others – banks and corporates/competitors – move first:
- have put in the language in external contracts saying that they will move to ‘a substitute rate’ when required, and also decided to wait until other ‘people’ move first before do anything else
- changed contract wording, and now waiting for others to move first
Problems emerging with:
- the systems and procedures to manage the LIBOR successor rates
- persuading legal and procurement teams to ‘get involved’
- how to solve the switch from a rate that includes credit risk and term rate to a rate that does not include credit risk
- transfer pricing for intercompany loans and satisfying the authorities that “we are not manipulating the rates”
- how OECD harmonization will affect the transition in each of the territories worldwide
- some companies feel that there is no enough corporate lobbying about the problems being encountered
- companies are finding it difficult to put together the team to tackle the problem, e.g. should it be a treasury led project or should it include treasury, accounting and tax? Or also include procurement and pensions too? Really needs a cross-functional team, but few can agree on the composition of such a team. Some are hoping that their Audit Committee get involved and demand a team of treasury, tax and accounting be put together to solve the problem.
CTMfile take: The transition from LIBOR problem is not going away, the pressure is building, but many seem to be waiting for someone else to move. Who will move first? The end of 2021 is not far away.
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