All of the major banks in the UK are now running customer engagement programmes to inform their clients about Libor transition generally, identify the issues that clients might want to focus on and offer solutions (this third point is somewhat behind the other two, but should start to catch up over the coming months as new products are brought to market). Conduct risk is broadly defined by the FCA as any action of a financial institution or individual that leads to customer detriment or has an adverse effect on market stability or effective competition. The FCA has deliberately set out a very wide definition of conduct risk, leaving the onus on financial services firms to prove how they are protecting customers. This is in recognition of the perceived imbalance of power between banks and their clients in this process. In preparation for transitioning legacy transactions, treasurers should focus on infrastructure. Firstly, systems: Treasury management systems (TMS) providers are working on providing solutions that will enable the booking of transactions that have interest that compounded in arrears (that being how many of the replacement risk-free reference (RFR) benchmarks are expected to work), but they cannot finalise system changes until there is greater clarity around market conventions. Corporates should talk to their TMS providers (remembering that most TMS vendors will only provide updates for the later versions of their software) but also consider how they might need to resource and time any updates to their systems. IT consultants will likely be in high demand as transition picks up speed, and many corporates have periods in the year where systems updates are not permitted (for example, over year end). Secondly, the mechanics of how to transition transactions from Libor to a replacement benchmark – specifically documentation – must be addressed. This can be split into: Re-documenting transactions is not straightforward as Libor has both term and bank credit factored into it unlike an RFR so a credit spread adjustment will also be required – and how that’s to be calculated is still something of an unknown. As is the case with IT consultants, lawyers are another group likely to be in demand as transition builds pace, so it’s worth talking to yours sooner rather than later. So, to summarise, while it may still feel like Libor transition is ‘a long way off’, or ‘may never happen’, neither is accurate. Corporates need to follow the banks’ lead and start to engage now in the process. If nothing else, they need to make sure that they are prepared for when things pick up speed. Sarah Boyce is associate director, policy and technical, at The Association of Corporate Treasurers
Last month, the Association of Corporate Treasurers (ACT) hosted a webinar exploring how banks were preparing to migrate from LIBOR and the implications for treasurers. The webinar focused primarily on legacy or back-book contracts, which potentially present the largest problem for corporates given the number of LIBOR-linked corporate loans. Major banks in the UK have launched customer engagement programmes to inform clients and identify the issues causing the most concern. Treasurers were urged to focus on infrastructure and liaise with treasury management system providers that are working on solutions for the switch to interest payments calculated using the compounded setting in arrears methodology.