Interbank Offered Rate (IBOR) transition will be one of the biggest transformation programmes that many firms will have undertaken. It is a complex undertaking, which may give rise to major risks for markets, firms and customers. In my previous post, I highlighted that regulators and supervisors had set out expectations that firms transition away from the London Interbank Offered Rate (LIBOR), to alternative risk-free rates (RFRs), by the end of 2021. While firms have been making progress since then, there is still some way to go. Deloitte’s global report, “LIBOR transition: setting your firm up for success”, outlines three key steps that Boards should consider to drive transition: (i) mobilise a cross-business unit and geography transition programme; (ii) set out a transition roadmap; and (iii) identify the risks and mitigations early. Although the report focuses on LIBOR, it is equally relevant to other IBORs.
The focus on reform is not abating, which makes taking action vital. The Basel Committee recently announced that it would consider pursuing work on IBOR reform this year. In December and November 2018, the International Accounting Standards Board agreed to add IBOR reform to its standard setting programme and the Financial Stability Board said it had ramped-up its work on the topic. Increasingly, we are likely to see global bodies expand their IBOR reform activities to drive further coordination and harmonisation among jurisdictions. Meanwhile, national supervisors will continue to put pressure on firms to progress their transition plans; where progress is too slow (particularly as 2021 draws closer), firms may receive "a shove or two".
Regarding potential new policy initiatives, the Committee will consider in 2019 whether to pursue work on three additional issues. First, the ongoing efforts to reform benchmark rates could raise a number of transitional and steady state prudential and supervisory risks for banks (eg valuation-related risks, basis risk, operational concerns with banks' models, and the initial liquidity of instruments referencing new rates). The Committee will consider the implications of these risks for the banking system.