The future of the London Interbank Offer Rate (LIBOR) has become highly uncertain since the UK’s Financial Conduct Authority (FCA) announced in 2017 that it would not compel or persuade panel banks to make LIBOR submissions after 2021. On 5 March 2021, the UK FCA announced the cessation of most LIBOR settings by the end of 2021 and the cessation of the remaining (USD) LIBOR settings by mid-2023. The publication of LIBOR is not guaranteed beyond 2021 and public authorities in many jurisdictions are undertaking steps to reform interbank offered rates (IBORs) and transition them to alternative risk free rates (RFRs). Jorge Fernandez Revilla of our Financial Services team explains.
LIBOR is currently used within a broad range of financial instruments, so companies can expect the rates transition to significantly impact a number of their functions and businesses. Organisations that don’t act now may face increasing costs and resource needs to manage the transition.
While the efforts to prepare for the transition away from LIBOR will be significant, operational readiness may be most demanding of all. KPMG professionals are assisting with the assessment of how wide and deep the impact may be and they are guiding numerous companies through the planning and implementation of necessary changes. The number of operational factors that must be considered grows quickly when impacts on products, systems and legal departments are entered into the mix. Structural differences between LIBOR and its proposed replacements make operational uncertainty unavoidable. These challenges are further exacerbated by looming unknowns in market conventions, market structure and legal certainty – not to mention the rapidly approaching LIBOR end-date.
The purpose of this article is to discuss the potential impact of the IBOR transition which, depending on the circumstances of the company, has consequences for many critical aspects of organisations, touching on financing transactions, contracts, operations, systems, models, processes, and accounting.
IBORs currently underpin a huge range of financial products and valuations, from loans and mortgages through securitisations and to derivatives across multiple jurisdictions. They are used in determining many types of pension, insurance, leasing agreements and are embedded in a wide range of finance processes such as remuneration plans and budgeting tools. The tax impact of all these items will also need to be considered.
The transition will, therefore, be felt far and wide. The challenge will be particularly acute for central counterparties, exchanges, banks, insurers, and asset managers, but the ripple effects will also be felt by corporations and consumers as the transition impacts, for example, the valuation and accounting for derivatives, corporate bonds, and business and consumer loans. The impact of IBOR reform need to be considered under the following headings.
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Jorge Fernandez Revilla
Partner, Head of Asset Management
KPMG in Ireland