CRISIL GR&A and Professional Risk Managers' International Association (PRMIA) are co-hosting a round-table to discuss on key issues and alternative solutions that are being pursued to meet the challenges around changes needed across a plethora of models impacting Risk Measurement, Asset Liability mismatch estimation and Transfer pricing.

The targeted 2021 date for LIBOR transition is not far away considering the amount of work and challenges which lie ahead. Join us for a panel discussion on some of the notable industry challenges surrounding the LIBOR transition in the United States:

• Risk Model Methodology: Challenges around risk model changes in replacing the LIBOR rates for SOFR-based including changes in discounting and forecasting curves
• Asset Liability Management: Changes needed in treasury functions due to the introduction of SOFR-based curves
• Transfer Pricing: Incorporating the impact of ARR on transfer pricing methodology and models, impact on funding rates and references, curve construction, and downstream transfer price estimation
• Fallback Rates and Spread Adjustments: Current proposals for SOFR-based fallback rates for existing products; current progress in implementation and market adoption

Our latest report

Steering the IBOR transition

The interbank offered rate (IBOR), which represents the cost of short-term and unsecured borrowings, is the most widely used benchmark interest reference rate. It is estimated that IBOR is referenced by outstanding contracts of $350 trillion, with maturities ranging from overnight to over 30 years.

The United Kingdom’s Financial Conduct Authority (FCA) said that it will not compel panel banks to submit their unsecured borrowings cost after 2021. Following this decision, the respective IBOR regulators are monitoring the progress of transition to new risk-free rates (RFRs) and the IBOR benchmark’s quality very closely. The concern is that regulators may declare that IBOR no longer represents the underlying market well before the December 2021 transition date. This would upend financial institutions’ (FIs) transition plans as they are already pressed for time and resources to meet the deadline.

In this paper, we highlight the immediate issues FIs face, and the areas of focus to ensure that they are well-placed for the transition. 

A major challenge for FIs is the liquidity of derivative products based on the new alternative reference rates (ARRs), given that IBOR-based products also continue to be traded. Enhanced liquidity for ARR-based derivative products is essential to construct the RFR curve for accurate pricing and hedging, and for product innovation to meet market requirements.

We have also discussed the results of recent regulatory consultations on pre-cessation triggers, fallback methods (for EUR), and possible ARR alternatives. Banks will rely significantly on these results to make changes related to technology and analytics, and strategise remediation of legacy contracts.