IBOR Transformation – Impact on your Regulated Data Estate?

By John Berven
on Aug 3, 2020

There has been a lot of scandal-driven regulatory change in the last 10 years, this is no less true for the reforms to Interbank Offer Rate (IBOR). Benchmark rigging in the US$350 trillion interest rate markets was the catalyst for a move away from the British Banking Association’s London Interbank Offered Rate (LIBOR) calculation to alternative Risk-Free Rates (RFRs). 

This was further accelerated by the 27 July 2017 announcement from Andrew Bailey, the then Chief Executive of the UK Financial Conduct Authority (FCA), who said that banks would no longer be required to submit the rates upon which LIBOR is calculated, effectively ending LIBOR as a commercial benchmark by the end of 2021.

To start with, institutions will need to identify and replace all IBOR rates within their organisation across every system, spreadsheet and report. We live in a world of rapidly growing and evolving data, so any failure to have catalogued this comprehensively means management cannot understand the impact across the enterprise. There is a substantial discovery that needs to be embarked on in order to enable decision‑makers to know what is used where.

There are many preferred alternatives and they are not always consistent with each other. As it stands, where alternatives have been identified, the focus has been on technical aspects and the repapering of contracts. There has been less focus on system changes and their contingent risks, as well as the practical realities of doing so.

The gaze of the regulators is now switching to how well prepared regulated entities are, whether they be in London or Taipei. As this happens the lack of a comprehensive understanding of data assets will come back to haunt market participants. They have to know everywhere they use rates in their calculations as well as how this is properly reported. Additionally, this all needs to be documented to allow for inspection at a future date, ie, what you did on the 21st March 2021, even if that question is asked in 2023!

Further challenges will evolve from the ability to manage the transformation and document the process evolution required to transition in a clear and concise format, one which has the flexibility to reflect the different transition implementation dates. For instance, the calculations and processes required to manage the net present value of existing contracts and which new rate will be adopted.

Organisations also need to look at how to manage the transition away from a forward-looking rate which includes default risk, to a backward-looking rate devoid of default risk and the associated basis risks of the change. The derivative market will face further complications, for example, with collateralised debt obligations, where there may be multiple underlying assets, any of which may reference an IBOR or which may also use varying risk-free rates.

The challenge we are addressing here is quite a profound one. Most organisations have only focused on contracts and not identifying everywhere an interest rate exists in their organisation, as simple as it sounds the consequences are vast. If you already use Solidatus then you are in a great place. You have the potential to leverage any regulatory lineage to identify the location of interest rates and reduce the discovery phase. If you don’t, then don’t despair, it’s quicker than you think to transform any existing regulatory or operational liability into an operational blueprint to reduce risk around future transformation and achieve heightened data governance.

For more information about how Solidatus can support your organisation, see our Factsheet.

Topics: Data Lineage, Metadata Management, Data Management, APAC

Author: John Berven

Director of APAC, John launched the Singapore office in 2019. He has extensive knowledge within the region and offers nearly 20 years of experience working in the information technology and banking industry.
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