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Capital Markets

We’ll Get to Libor Later

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November 06, 2019

By John Hintze

Two surveys say nonfinancial firms are falling behind in Libor transition efforts.

Nonfinancial companies are taking a passive approach to prepping for the transition away from Libor, relying heavily on their banks and other financial firms to carry most of the burden. According to recent surveys, however, the financial community is lagging.

In its recently published “Liboration: A practical way to thrive in transition uncertainty,” Accenture spells out financial services firms’ lackadaisical efforts toward the transition, even though regulators have reinforced that they will no longer support the benchmark past 2021.

A survey of firms in the private equity, real estate and infrastructure sectors also found laggards. Conducted by JCRA, an independent financial risk advisory firm, and law firm Norton Rose Fulbright, it found that just 11% of derivative users in those sectors believe their Libor-referencing contracts contain provisions appropriate for the benchmark’s permanent discontinuation.

Furthermore, 38% of respondents described contract renegotiations to accommodate Libor’s discontinuation as “not having started,” while 26% said they were a work in progress, and 23% had yet to identify which contracts require amending. No respondents said they had completed renegotiations.

The seemingly less than urgent approach is of critical importance to corporates, which Accenture concludes are relying heavily on their financial services firms to aid their own transitions. Its survey describes numerous areas in which banks are lagging that corporate customers may want to inquire about:

  • Transition plans. More than 80% of survey respondents reported having a formal transition plan, but only 59% said they had a unified and consistent transition and remediation approach. Only a quarter of respondents plan to allocate funds to product design over the next three years, and just one in seven plans to invest in technology and one in ten in legal remediation, areas directly impacting customers and which Accenture calls critical to an effective transition. As far as corporates relying on their banks to hold their hands through the transition, the survey found less than a tenth of respondents expect to fund client outreach activities.
  • Preparedness. While 84% of respondents reported having a formal transition plan in place, only a third said those plans had been in place for more than a year. The survey found only 18% of respondents describing their plans as mature. In addition, “lower-level planning of granular detail and transition activities appear to have only begun in earnest in 2019,” despite regulators’ warnings since the summer of 2018.
  • Talent and capabilities. Only 53% of survey respondents reported having the necessary talent or capabilities to complete their transition by the end of 2021, the point after which Libor is likely to become “unrepresentative” of bank borrowing costs. And only 47% claim to have sufficient funding to support their Libor initiatives.
  • Pertinent to corporates. Accenture notes that “Banks and financial firms should also expect increased demand for information as the transition progresses and be prepared to provide updates on stress tests and risk forecasts as well as evidence of the changes put in place across the business and technology area to facilitate the transition.”

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