Firms that have LIBOR exposures are making progress in their preparations for the transition, but face a number operational, technology and trading hurdles, according to a new survey by Bloomberg and the Professional Risk Managers’ International Association (PRMIA). The survey which was conducted from June 2021 to August 2021 polled 134 senior executives from financial services firms and corporations around the globe who are facing derivatives exposures due to the switch from LIBOR to risk-free rates (RFRs).
The results indicate that firms are aware of and planning for the LIBOR transition, but are executing the process with varying degrees of confidence.
According to the findings, 89% of respondents indicated that their firms would be mostly (54%) or completely (35%) ready for the transition on schedule. However, the top challenges identified were technical in nature, demonstrating how the LIBOR transition poses difficult obstacles for even the most sophisticated firms. 82% of respondents identified systems and operational readiness as a hurdle, and the same percentage pointed to repapering existing contracts and agreements as a challenge. Other factors identified as challenges include choosing and transacting in new alternative rates and conventions (72%), and outreach and negotiation with customers (70%).
Despite this, firms are still making important transition decisions. A wide majority of firms (78%) have already taken critical steps like identifying exposures and assessing transition risks. However, only 65% have taken steps to determine the impact of risk-free rates on legacy instruments, and only 46% have integrated new products based on these new rates into their go-forward strategies. In addition, the survey found that while more than 14,600 firms have signed ISDA’s 2020 IBOR Fallbacks Protocol as of October 2021, 72% still expect their firms definitely or probably will continue to hold LIBOR-based derivatives after December 31, 2021.
“As we enter the final phase of the LIBOR transition, there are still many critical decisions firms need to make, no matter how advanced they are in the transition process,” said Jose Ribas, Global Head of Risk and Pricing Solutions at Bloomberg . “We are focused on providing clients with solutions that support their efforts at all stages of the transition process to meet the recommended timelines.”
Bloomberg delivers a comprehensive suite of solutions to support LIBOR transition, including scenario analysis to determine the impact of transitioning to RFRs on portfolios. Licensed customers can download cash security fallback datasets to help identify relevant fallback language for IBOR-linked securities in their portfolios. Clients can also access fixed income reference data, which provides detailed terms and conditions supporting the new structures and calculations, and corporate actions data. On the Terminal, Bloomberg offers trading services in cash securities and derivatives referencing RFRs. Bloomberg also publishes term and spread adjustments for the fallbacks that ISDA intends to implement for certain IBORs. In addition, BSBY, Bloomberg’s Short-Term Bank Yield Index is a series of forward-looking reference rates with embedded risk premia at that measures the yield at which systemically important banks access USD unsecured wholesale funding.