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. 

    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.  

  

   Limitless interconnections between market participants create potential for disruptions and dislocations.

 Delaying transition plans and activities harbors significant financial, operational, reputation, and legal risks.

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

Many Reasons for Disruptions and Dislocations at the 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 other attributes.  Substituting the overnight SOFR index (with or without modifications) for different LIBOR terms may break legacy instruments, agreements, economics, risk, valuations, policies, etc.  Implementing and integrating new SOFR-based products, models, frameworks, processes, payments, systems will be quite challenging if institutions begin now.  It will become progressively more difficult, error-prone, and costly as the deadline approaches. 

Many known challenges to resolve; Many unknowns will emerge

While SOFR is simple and transparent to understand and capture, its replacement for LIBOR will create many challenges, at many levels.  Any financial institution that engages in LIBOR-based instruments will need to make substantive changes to the 5 principal dimensions of the organization namely, business, finance, operations, technology, and governance.  Other non-financial organizations that use LIBOR for financial forecasting, modeling, and valuation will also need to modify their frameworks, policies, and processes.  

In this complex 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 highly informed, strategizing astutely, minimizing missteps, and realigning quickly along the way. 

Differences, Multidimensions, Interdependencies to Navigate before a Short Deadline

Differences between LIBOR and SOFR, multidimensional impacts on organizations, interdependencies between thousands of participants, and short deadline of Dec 31, 2021, will undoubtedly create process disruptions and value disclocations. 

Let's walk through the "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.  A mixture of directly impacted and fringe participants will complicate matters.

Third, operationalizing SOFR-based products, processes, frameworks, and technology changes - all at the same time will be complicated.  The vast number of changes that need to be made and accepted by cross-dependent businesses, customers, software vendors, platforms, lawyers etc. by Dec 31, 2021 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 and 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.  Financial institutions need to make a choice: Start the transition journey soon to understand and mitigate risks before the sunset of LIBOR;  Or prepare for the disruptions, dislocations, and reputational risks after 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 for the 5 Dimensions of Your Organization with our Services & Solutions in a 5 Phase Approach  

 What initiatives are needed for the "5-Dimensions" of the organization

   Business:  Products/Customers | Treasury | ALM & Risk

  • Business risk & return analysis from transition and 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

   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

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 

   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

   Enterprise Functions:  Legal, Risk Governance, Reporting 

  • 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

     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 

 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

 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 

     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

How we help clients with our services and solutions in a "5-Phase" approach

 

 

  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.

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