Life after LIBOR: manage benchmark rate reform
LIBOR reform: a radical change for global business
LIBOR benchmark interest rates are to be discontinued. Hundreds of trillions of assets are tied to the old benchmark rates, many in contracts running beyond the 2021 deadline. Business has to respond now – not just banks and financial services providers, but corporate treasurers across industries.
LIBOR fallback clauses in existing contracts might not be enough to ensure a smooth transition to the new benchmark rates after LIBOR is phased out. This means it's important to understand the alternatives and how to manage the change.
The background
The London Interbank Offered Rate (LIBOR), used as the basis for interest rates all over the world for more than thirty years, will definitely be discontinued at the end of 2021. With an estimated USD 260 trillion in outstanding contracts for loans and other financial instruments tied to LIBOR benchmark rates (e.g. CHF LIBOR, EUR LIBOR, Euribor, GBP LIBOR and USD LIBOR), the implications are staggering. Massive disruption to business and the markets can only be avoided if companies manage their contracts intelligently to negotiate the transition from LIBOR interest rates. The new risk-free rates will affect all industries that use or have investments in interest rate linked products, and affect a comprehensive set of financial instruments including fixed-income securities, loans and mortages, and derivatives.
The transition to the rates replacing the existing interbank offered rates (IBOR) will require significant efforts by institutions to address the impact on business activities, client interactions, control processes, systems, risk management and financial performance. Organisations must begin now to prepare for and manage the transition.
PwC’s team in Switzerland and established global network of specialists deeply understands key LIBOR-impacted areas, such as:
- Capital markets
- Commercial lending
- Retail banking and wealth management
- Investment management
- Insurance
- Market infrastructure
- Corporate treasury in all other industries outside financial services
We support you across the entire life cycle of the transition, beginning with mobilisation and governance, impact assessment, definition of remediation work streams, contract management and remediation, client outreach, systems & process changes, risk and valuation model changes, and managing related tax & accounting implications.
What to be aware of
LIBOR reform: are you ready?
Numerous challenges will need to be addressed as the journey towards alternative benchmarks progresses. These challenges differ from industry to industry.
Impact on banks and financial services
LIBOR’s discontinuation is a paradigm shift in the financial industry, impacting banks' entire value chain from retail to treasury to trading. Market participants in financial services should adapt to upcoming changes at an early stage to be prepared and benefit from the new environment.
Beyond banks: considerations for corporate treasurers
But LIBOR discontinuation impacts companies in all other industries as well. Given that the pricing of many financial instruments is tied to LIBOR, upcoming changes will have significant implications for corporate treasurers. To meet the deadline, treasurers need to do an evaluation and impact analysis, create a roadmap and timeline, assess the implementation costs and take the lead in areas such as contract management and documentation.
- What should firms be doing now to prepare for LIBOR replacement?
Are you aware of the impact of LIBOR reform on your business and the work required to ensure a smooth transition when LIBOR is replaced? - What will replace LIBOR?
Are you familiar with the ARRs, the new alternative reference rates (e.g SARON, ESTER, SOFR, SONIA) and how they differ from LIBOR and existing benchmarks such as EONIA? - Are you taking advantage of the available guidance?
Organisations such as the ISDA are producing guidance, including template contract wording, that will save your firm a considerable amount of effort and uncertainty.
Contact us
Patrick Akiki
Advisory Partner (Finance Risk and Regulatory Transformation), PwC Switzerland
Tel: +41 58 792 25 19
