• BCMstrategy, Inc.

QOTD -- The FSB Speaks on #LIBOR

Readers could be forgiven for thinking that the LIBOR transition has hijacked our blog. It is true we have been writing about this quite a bit during October. We cannot resist. Nearly every day brings a new development that receives little to no attention in the media because it is so technical, as our PolicyScope data shows:

The time series illustrates that one does not need big data or high volume to generate a big impact on markets and risk management.

The moves being made this month by policymakers around the world (United States, Australia,and the ECB) regarding the LIBOR transition are significant. It is extraordinary to see these moves in part because the full architecture is not yet ready to support robust pricing and risk management in the new market-based benchmarks. Among other things, the ISDA fallbacks protocol will not be issued until later in October.

The situation is sufficiently challenging that the Commodity Futures Trading Commission in the United States has issued two No-Action letters this week providing delayed reporting for swap transactions and pricing data for transactions discounting the Effective Fed Funds Rate to SOFR. Policymakers continue to insist, however, that the transition will indeed occur in 2021.

The Financial Stability Board returns to the fray today by providing a roadmap for financial firms to follow as they prepare for the transition. But the benchmark for Year-End 2020 is odd:

Can you spot the problem? Actually, two discrete problems arise from the Year-End 2020 targeted milestone.

The language and the report itself at first glance seem very solid. But look closely at the language.

  • First, the borrower gets to choose the reference rate....what happens if the borrower chooses to stick with LIBOR?

  • Second, the FSB itself has acknowledged that the pricing and transaction support systems may not be ready when the transition period has ended.

The third problem is implicit. The roadmap does not acknowledge that the industry-led fallback provisions are very late in being published. If the fallbacks are published on October 23 as promised, this gives the global financial industry less than three months to adjust all legacy contracts AND update risk management systems to assess the new risk profiles for those contracts. But in the United States, some of the data used to support those risk assessments will not be available given the pragmatic effort by regulators to provide extra time for regulatory reporting.

Risk managers responsible for assessing LIBOR transition risks and portfolio exposures have never needed a window into the public policy process more than they do today. Compliance officers seeking to implement new oversight structures similarly need the same responsive access to data and information regarding the LIBOR transition even though their outputs (internal control systems) are different. Being able to spot individual moves as they occur is now essential.

Our PolicyScope Platform automatically tracks and measures public policy risks. It tracks LIBOR-related risks daily, globally, and automatically. The Platform can help you spend less time trying to find relevant information. The time you save can be spent on higher value activities like strategy formation.

To learn more about how we can help you stay on top of the global public policy cycle during the Benchmark Reform process, please contact us HERE.