Perspectives | 30 October 2019
With significant IBOR reform on the horizon, Mazars brought together industry experts, practitioners and regulators to discuss the challenges and opportunities they face. Speakers included the Bank of England Market Division’s Alastair Hughes, EFRAG’s Didier Andries and Mazars’ IBOR lead, Pauline Pelissier.
From a comprehensive and illuminating session, Pauline sums up the key takeaways:
“What is most apparent is that we are engaged in a period of profound change, which impacts on a vast range of financial instruments. IBOR reform is both far reaching and fast moving”.
The transition of the sterling market from LIBOR to SONIA is already well underway. This is not altogether surprising in the derivatives market, which now demonstrates a broadly equivalent volume of GBP LIBOR and SONIA-linked contracts. However, similar trends are apparent in the cash market. Bonds, securitisations and floating rate notes (FRNs), such as BMW’s £250m SONIA-linked FRN in August, underline corporates’ increasing interest in this area.
Barriers still exist around the loan market, and around the fact that LIBOR is embedded in existing regulatory requirements, but market participants and regulators are working hard to find feasible solutions. The accounting profession has shown an excellent ability to overcome barriers. In response to industry concerns, the International Accounting Standard Board (IASB) published (May 2019) an Exposure Draft Interest Rate Benchmark Reform which proposes exemptions to specific hedge accounting requirements in IFRS 9 and IAS 39 and, to disclosures in IFRS 7. EFRAG’s Endorsement Advice on those Amendments was submitted to the European Commission on October 16, 2019. The accounting challenge, however, is far from over: The exemptions granted by the IASB covered the so-called Phase 1 (pre-IBOR replacement). Financial reporting issues arising from Phase 2 (post-IBOR replacement) are still to be dealt with, and the endorsement of those Phase 2 amendments will need time to embed; time that the industry might not have if it wants to transition. The challenge now is to break the cycle of accumulating LIBOR-linked derivatives and to move towards SONIA-linked derivatives.
The feeling is that the PRA and FRC’s expectations is to move away from LBOR and to focus on SONIA faster than is currently happening, even if this means implementing additional reporting or enforceable policies. Indeed, the Bank of England’s Financial Policy Committee: “will consider further potential policy and supervisory tools that could be deployed by authorities to reduce the stock of legacy LIBOR contracts to an irreducible minimum ahead of end-2021[1].Whilst the pace is currently dependent on market willingness, if it’s not fast enough for the PRA and FRC, the transition might be taken out of their hands.
A successful transition should not overlook other more discrete risks, such as conduct risk and a robust reporting process to meet all stakeholders’ expectations, be they external (regulators, clients, investors) or internal (department, senior management, Boards) needs to be implemented.
Although progress has been made, challenges remain. Solutions are on their way, but the clock is ticking.”
[1] Statement on behalf of the Working Group on Sterling Risk-Free Reference Rates – Progress on adoption of risk-free rates in sterling markets – 15 May 2019
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