Libor Transition – are we into the end game for Operations?

With less than 2 months until the cessation of non-USD LIBOR tenors[1], organisations are in full execution mode to get themselves operationally ready to support risk free rates and say goodbye to LIBOR. However, it would be naïve to believe that this is the end-game with the recent communication from the FCA on the use of synthetic LIBOR[2] and USD LIBOR still in existence until June 2023.

This blog explores what Global Markets Operations functions should be considering as we say goodbye to non-USD tenors and say hello to 2022.

Some of the key items that we are talking to clients about are:

• Divergence in implementation of fallback
• Pivoting to USD
• Product decommissioning
• Lessons learned

Divergent approaches to the operationalisation of fallbacks

 As described in our blog on the Operationalisation of Fallbacks, there are 2 broad categories of approach being taken to representing fallbacks on legacy transactions: 1) some variant of cancel/rebook and 2) amending the pricing source in the background so no trade details change. Whilst both approaches are valid, firms should consider the implications on reconciliations and other processes when their counterparties have chosen to operationalise their fallbacks using a different approach. For example, a firm choosing to cancel / rebook trades will need to consider how they will reconcile any differences with counterparties who take a different route.

Up to this point, LIBOR transition training has for the most part been targeted at front of house teams but moving forward, there will be an expectation that teams undertaking reconciliation activities (i.e. Operations) will need to understand that the different approaches to how LIBOR Transition has been enacted in the market to be able to make the right decisions when performing their daily reconciliations. 

Don’t be surprised to see an uptick on discrepancies (for example, settlement differences) with counterparties moving into Q1 2022, and start thinking now how those could be avoided. 

Focus on USD

In the last 2 years the focus has been on ensuring that firms are operationally ready to support the cessation of LIBOR, but with the FCA’s confirmation in March 2021 that USD LIBOR would continue until June 2023, firms inevitably prioritised being ready for non-USD LIBOR cessation.  Now, the focus is shifting again, with analysis commencing to understand what challenges lay ahead when transitioning away from USD LIBOR. 

It is likely that for most firms, the legacy USD portfolio is significantly larger than the non-USD LIBOR portfolio, and despite most of the foundations being laid to support operational readiness, consideration now has to be given to the volume and scale of the issue; it is also important to remember that USD LIBOR is an input to a number of APAC benchmarks and impact here will also need to be determined.

Furthermore, the ongoing development of post USD LIBOR products will require Operations involvement during the rigorous approval processes as firms move to ensure they are ready to go to market and remain competitive against their peers.

Product Decommissioning

Libor and related products are already largely subject to stop-sell and other restrictions and from the start of 2022 will in many cases exist only in ‘fallen back’ mode. Legacy products will however continue to exist in systems and various processes, with potential to cause operational and system complexity and issues. Operations teams should be advocating for plans fully to decommission and remove these products from platforms: this is often a surprisingly hard thing to do and agreeing trajectories  to execute this would be in the interests of Operations teams.

Lessons Learned

Q4 2021 will be a busy quarter with 4 CCP Bulk conversions and numerous other activities in flight to support LIBOR Transition.  We expect to see Q1 2022 to be equally busy – with almost inevitable remediation and ‘clean up’ activities. It is critical, against this background, not to neglect learning from the cessation of non-USD LIBORs once teams have seen how these actually played out.

Q1 2022 will provide an opportunity to look back and ascertain what could have been done better across several different operational activities such as resourcing, run books, impact on business as usual activities.  Ideally firms should be ready to share their experiences with regulatory supervisory teams and at industry forums, where appropriate, to learn from each other and support the industry in executing USD transition cleanly and efficiently.

Conclusion

So is the end game upon us? The answer is ‘not yet’… We have highlighted here some key areas that firm should consider as they start to think about planning for 2022 and beyond.

If you would like to know how Deloitte could help you in planning for your 2022 activities, then please reach out to Gwun Olley or Rollo Burgess for more details.

[1] On the 5th March 2021, the Financial Conduct Authority (“FCA”) confirmed that the publication of the majority of LIBOR currencies will cease on 31st December 2021: https://ir.theice.com/press/news-details/2021/ICE-Benchmark-Administration-Publishes-Feedback-Statement-for-the-Consultation-on-Its-Intention-to-Cease-the-Publication-of-LIBOR-Settings/default.aspx

[2] https://www.fca.org.uk/news/press-releases/further-arrangements-orderly-wind-down-libor-end-2021