The London Interbank Offered Rate (LIBOR) widely used in the global financial markets and called the "world's most important Interbank Offered Rates" with a notional value over USD 350 trillion globally is calculated and published daily in five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) by the Intercontinental Exchange Benchmark Administrator (ICE BA).
In 2012, a series of the allegation raised for LIBOR calculation and numerous fines imposed to several international banks for which UK Government conducted Wheatley Review that recommends
- LIBOR reforms rather than replacement
- Called for a strict process to verify submission with transaction data
- Market participants should play a significant role in LIBOR production and oversight
Benchmark transition has been on the global list since 2014. Finally, in 2017, the Financial Conduct Authority (FCA) examined the future of LIBOR. It passed the regulation to replace LIBOR with the Alternative Risk-Free rate. Derivatives, bonds, mortgages, loans, mutual funds, securities, underwriting, deposits advances, pension funds, and contracts worth $370 trillion currently linked to a scam-hit LIBOR. These needs to be transitioned to a new benchmark rate wherein the Central banks and regulatory authorities impose that it would no longer persuade, compel, or submit to LIBOR beyond 2021 and work towards transition planning to alternative reference rates (AFRs).
Transition impact on the financial markets eco-system?
Individual financial institutions are expected to spend USD 50 million to USD 100 million a year for the next two years, and analysts believe that for the IT industry, 50% of this pie would be the opportunity size. The opportunity includes:
- Assessment of current exposure to LIBOR
- Creation of new products based on the latest rates
- Creating new legal documents/contract amendments for the existing contracts, which will go beyond 2021
- Identification of internal and external IT dependencies
- Adjustment of data management (historical data)
- Process adjustments
The significant impacts will happen in data management space wherein new ARRs create multiple challenges in Data sourcing, Modelling, and Distributing. Changes impact from supply feeds from market data vendors to data modeling in the EDM platform, as well as downstream data distribution.
How Mindtree can help financial institutions in effective LIBOR transition
The transitioning of LIBOR to a new benchmark rate creates a massive opportunity for the IT industry and business consulting services. It is a complicated assignment, and impact varies across financial institutions. Implementation of new alternatives risk-free rates that replaces LIBOR will be different for each financial institution due to product exposure.
Mindtree will establish an enterprise-level governance and program management for LIBOR transition for financial institutions accessing the risk and impact areas covering trading, liquidity, liquidity, pricing, risk valuation, tax, accounting, and legal businesses and related to technology operations. Entire transition road map covers:
- Analysis across enterprise covering all lines of business and geography
- Setting up centralized governance and program management structure
- Identify the right stakeholders required to conduct an assessment, set methodology, impact analysis, and identify the next steps from each business function.
Mindtree can also collaborate with a financial institution in designing the LIBOR transition roadmap in four phases.
- Initial and Exposure Assessment,
- Scoping and Program plan
- Transition management and implementation.
- Readiness and Post Go-live managed services.
Moreover, Mindtree in collaboration with a FinTech partner viz Capital Quant which provides cognitive automation solution focused on the financial services sector came up with a machine learning and an NLP based solution in LIBOR Transition space. The agreement documents can be uploaded into FinStinct platform and digitized wherein ML and NLP based models are used to identify the key terms of the contract which are extracted. The system identifies whether a contract needs to be re-papered or not. It then provides a workflow to take the agreement from extraction to validation to generation of the amendments. FinStinct platform is a comprehensive cognitive automation solution for the financial services sector to take financial institutions from Documents to Decision making.
Conclusion:
LIBOR replacement with alternative risk-free rates is a critical transformational assignment in the global financial market landscape. Banks and Financial institutions should act now for a successful transition of new risk-free rates. Mindtree recommends financial institutions start initial assessment right now to enable cost-efficient and timely transformation. Any delays may have to give a high price for implementation. Mindtree can work with cross-functional teams within banks & financial institutions to implement our transitions plans with the goal of a controlled and smooth transition of LIBOR with minimal business cost and disruptions.
