Ensure a Swift, Stable, Secure LIBOR to SOFR Transition of Your Organization 

Well Publicised Fact:  LIBOR will Sunset on December 31, 2021  

LIBOR and all other IBORs (inter-bank offered rates) are scheduled to retire permanently on Dec 31, 2021.  This "switch-off" date has been well-publicized for many years.  Their replacements, ARRs (alternative reference rates), have been created by the combined efforts of regulators, industry groups, and large-users.  SOFR (secured overnight financing rate), the replacement rate for LIBOR, has been championed by the US Federal Reserve, the ARRC (Alternative Reference Rate Committee), and the ISDA (International Swap Dealers Association).  It is an overnight financing rate, calculated daily based on market trades of risk-free securities, and published the following morning by the Federal Reserve of New York. 

Multidimensional issues will create Complexities and Challenges

While SOFR is simple and transparent to understand and capture, the upcoming transition from LIBOR to SOFR will be anything but simple or smooth.  Every institution that engages in LIBOR-based financial instruments or uses LIBOR for forecasting and valuation will be impacted.  Transition to SOFR will require changes to the 5 principal dimensions (business, finance, operations, technology, and governance) of every financial institution.  There will be visible and obscure financial and non-financial risks, including for reputation.  In the transition journey, every organization will encounter its own distinctive set of challenges depending on its gaps in skills, resources, infrastructure, and budget.  A swift, stable, secure transition will depend on being informed, strategizing astutely, minimizing missteps, and realigning quickly along the way.

    LIBOR to SOFR transition is multidimensional and will create complexities and challenges because

                                                                            Every Financial -

         

                    Product | Agreement | Document | Disclosure | Data | Calculation | Forecast | Model

                   Valuation | Process | Technology | Framework | Platform | Policy | Procedure | Report 

               ... that is linked to LIBOR, directly or indirectly, will need remediation before the end of 2021.  

  A successful transition requires a cohesive execution of multidimensional projects with strong governance.

  

  This global transition with limitless interconnections between market participants will undoubtedly create     disruptions.  Delayed transition plans harbor significant financial, operational, reputation, and legal risks.


 

Innumerable Reasons for Disruptions at Macro and Micro Levels 

 

SOFR is Fundamentally Different from LIBOR

It is critical to note that LIBOR and SOFR are vastly different in their concept, construction, credit, calculation, transaction, term-structure, economics, risk behavior, transparency, and many other attributes.  Substituting the overnight SOFR index (with or without modifications) for different LIBOR indexes may break legacy instruments, agreements, economics, risk, valuations, policies, etc.  Implementing and integrating new SOFR-based products, models, frameworks, processes, payments, systems will be challenging if institutions begin now.  It will progressively become more difficult and expensive closer to the 11th hour. 

Differences, Dependencies, Deadline, will Create Disruptions and Distortions

Differences between the two indexes, interdependencies between thousands of participants, and short time to the deadline of Dec 31, 2021, will create many process disruptions and value distortions.  Let's walk through "Why, "How", and "When":

First, LIBOR has been entrenched in the global financial system for more than 40 years.  It is embedded in more than $240 trillion on-balance-sheet financial products and off-balance-sheet financial instruments and derivatives.  About 40% or $100 trillion of these will need restructuring based on some methodology.  The currently favored method for mass conversion is to use a historical "spread" adjustment.  This will inevitably create distortions in valuations of financial assets, liabilities, and derivativesImmediately after conversion, financial instruments will need to be marked-to-market.  There will be windfall gainers and losers.  Many of those who get hurt will litigate.

Second, the retirement of LIBOR will impact not just financial institutions that use LIBOR-based financial instruments in their business but will impact all organizations that use it for forecasting, modeling, and valuation.  This considerably expands the eco-system of affected participants.

Third, operationalizing SOFR-based products, processes, frameworks, and technology changes will create complications for financial institutions.  The large number of changes that need to be made and accepted by cross-dependent businesses, customers, software vendors, platforms, lawyers etc. by Dec 31, 2021 presents formidable challenge.  The transition to SOFR will undoubtedly disrupt many workflow chains.

Slow to "Start" is a Huge Problem  

Many financial market participants that use LIBOR, particularly small and mid-sized financial institutions, have been slow to acknowledge or start LIBOR-to-SOFR transition.  This slow start is greatly alarming regulators as they continue to stress no change to LIBOR's sunset date, despite the interruptions caused by COVID-19.  Very soon, the processes and valuation for LIBOR based instruments is going to be disrupted.  Financial institutions should prepare for the changes in an operationally sound way before the sunset of LIBOR or suffer from business disruptions and value dislocations when LIBOR goes dark.   

 

  

  Regulators are very concerned about the slow progress of many financial institutions

  Many large institutions started early and by now have LIBOR transition initiatives at advanced stages of implementation.      Unfortunately, many small and mid-sized institutions are lagging in awareness, readiness, skills, budgets, and technology    to execute this multidimensional transition.  There is a clear and present danger to operations, financials, and reputation. 

   Andrew Bailey, Chief Executive, Financial Conduct Authority

   “And for firms who are not yet aware, not yet engaged, and without plans to address their LIBOR-related dependencies,       I warn you again of the risks.”

   Michael Held, Executive Vice President and General Counsel, Federal Reserve Bank of New York

   “This is a DEFCON 1 litigation event if I’ve ever seen one... a “situation that invites litigation” that “would be on a                 massive scale.”

   John C. Williams, President and Chief Executive Officer, Federal Reserve Bank of New York

   “Some say only two things in life are guaranteed: death and taxes. But I say there are actually three: death, taxes, and         the end of LIBOR.”

   Linda Lacewell, Superintendent, NY State Department of Financial Services

   "....the Department requires that each regulated institution submit a response to the Department describing the                   institution’s plan to address its LIBOR cessation and transition risk."

​​​  All regulated financial institutions need to ask themselves 3 important questions:

    1. Are we FULLY INFORMED about the risks and impacts of the Transition and Conversion to our institution?

    2. Are we STRATEGICALLY PREPARED to accomplish the Transition and Conversion for our institution?

    3. Are we OPERATIONALLY CAPABLE to conduct the Transition and Conversion at our institution?

                                           For most small and mid-size financial institutions,

                                               the answer to at least one of these questions

                                                                   is going to be, "NO"

  

 Where is your organization in its LIBOR Transition and Conversion Journey?

 What should small and mid-size financial institutions do to get started and accelerate?  

 

 To navigate this complex transition and mitigate this minefield of risks, small and mid-sized financial institutions need to:

 1. Fully understand and assess transition risks and impacts across the organization

 2. Develop strategic roadmaps with prioritized initiatives and milestones

 3. Cohesively execute the transition initiatives by employing right-fit technologies

 4. Enable parallel operations, test, and complete the transition in a timely manner to thrive in the post-LIBOR eco-system

 5. Convert financial products, agreements, contracts, documents using AI to "read, index, remediate" at machine scale

 We can help with Our 5x5 Framework for Strategy and Operationalization

 We work with small and mid-size clients to help solve their pressing issues and turn challenges into opportunities.           To accommodate the intense complexity of LIBOR transition, we created a specialty division of our firm focused on this.   Our LIBOR Transition division brings unparalleled industry expertise, experience, and artifacts to execute our 5x5       framework of Services & Solutions in a 5 Phase Approach for the 5 Dimensions of Organizational Initiatives

Our Services and Solutions for LIBOR Transition and Conversion

     Education and Assessment

  • Providing senior management education

  • Assessing and documenting key issues, exposures, impacts

  • Identifying and evaluating impacts of transition and conversion for your business, financials, operations, technology, and legal+enterprise functions

  • Analyzing and presenting recommendations for remediation 

     Execute Roadmap, Programs, Initiatives, Technology

  • Bring Artifacts, Templates, Samples, Resources 

  • Program and project leadership and/or management

  • Program execution for Business, Finance, Operations, Technology, Communication, and other Enterprise functions 

     Strategy     |    Roadmap   |  Initiatives Prioritization

  • Create LIBOR Transition and Conversion Roadmap 

  • Create Execution Program of changes and sequencing for business, operations, financials, technology, and organization functions of legal/tax/accounting/reporting

  • Create Transition Program, Conversion Program, establishing communication, management, monitoring and governance

     Transformation, Testing, Training, Support

  • Enable organization transformation for post-LIBOR eco-system 

  • Operate in parallel with new rate indexes until needed

  • Test products, processes, technology 

  • Provide support, training, post-implementation enhancements

   Conversion of legacy agreements, contracts, products at machine speed using AI

  • Provide strategy for when and how to convert documents, products, systems

  • Provide communication strategy for customers, counterparties, vendors

  • Accelerate legacy contract remediation by using technology to:

    • segment legacy LIBOR documents by terms/product/customer for complexity and risk

    • “read, index, remediate” legacy LIBOR disclosures/contracts/products at machine pace and scale, directly in systems of record

Initiatives for 5 Dimensions of Organization Impacted by Transition and Conversion 

   Business:  Products/Customers | Treasury | ALM & Risk

  • Business risk and return impacts from transition & conversion of products, derivatives, agreements, models, frameworks

  • Communication strategy for customers, counterparties, vendors, regulators about new products and conversions

  • New product design, pricing, timeline, hedging, policies

  • Liquidity, Cash, Income/Expense forecasting and monitoring

  • Cost of funds recalibration; hedge ratios of new derivatives

  • Portfolio and ALM risk-limits for scenario analysis with SOFR

Operations:  Data/Calculations | Workflows | Processes

  • Redesign processes for:

    • Data capture, verification, calculation, usage methods

    • Trade Acquisition, Settlement, Confirmation, Systems

    • Servicing and Payments/Receipts 

    • Collateral valuation processes

  • Provisions to accommodate vendor upgrades of software

  • Redesign processes for new products, models, forecasting 

   Financial:   Modeling |   Valuation  |  Accounting

  • Evaluate changes to Forecasting, and impacts to Cashflows, Earnings, Expenses

  • Quantify financial exposure and impacts to Balance Sheet

  • Evaluate and Acquire SOFR models; Validate Models  

  • Estimate impacts to Risk; VaR, DFAST, PPNR, CECL, CCAR

  • Evaluate effects of Re-striking; Valuation changes for “spread”

  • Verify Hedge Accounting

  • SOX considerations for valuation certification

   Technology:  Automation & Digital Transformation

  • Map vendor dependencies to integrate with legacy systems

  • Update systems to capture and process both Legacy and new data, sources, calculations, methodologies, models, products, reporting

  • System code changes to make payments adjustment

  • All integration work

   Legal and Risk Governance

  • Digitize all legal documents

  • Use AI technologies to evaluate the “absence, existence, and strength” of Fallbacks

  • Create Taxonomy of documents and Prioritize based on Fallbacks and customer cohorts

  • Evaluate Tax considerations of instrument and derivatives valuation changes, and value transfer monetization

  • Evaluate Tax consideration of unwinding or re-striking

  • Evaluate Regulatory and Reputation Risks

  • Update Policies, Procedures, Controls

  • Update Disclosures and Reporting

 

 

 

  3-Key Advantages in working with FIRM Advisors for your LIBOR Transition

  1. We are a boutique advisory firm with a prime focus on LIBOR transition

  • While many large consulting firms are engaged in full “post-covid” process and business model re-design for entire corporations, we are (and have been for the last 3 years) dedicated to LIBOR transition as our business focus.

  • Our expertise is diverse, and specifically aligned with the skill sets required for LIBOR transition, notably risk management, capital markets, derivatives, consumer finance and contracts, including representation on the ARRC committee itself as chair of the securitization sub-committee.

  2.  Our interaction model is technology-intensive

  • Extensive use of digital processing allows for a “socially distanced” work approach, where we may access files remotely and fast track document, transaction, and back-office systems analysis with little recourse required to our clients.

  • This allows client interaction to avoid the minutia of “process” and engage with a strategic and solutions orientation.

  • Our expert services are integrated with an AI technology solution that ensures better, faster, cheaper delivery.

  3. Our business model can switch seamlessly between on-site and off-site process.

  • While we love to see our clients face-to-face, a small engagement team makes zoom/ring conferencing an easy switch.

  • With COVID's second and third “wave” potential, it is imperative that we present an uninterrupted process, where deadlines are not impacted by systemic risk or the global environment

 Post Covid, we would be delighted to work alongside your teams at your location and complete background   work at our own headquarters in Tysons Corner, Virginia.

FIRM Advisors, LLC -- A minority owned and operated company of Practitioner Subject Matter Experts from the Industry