Buy-side firms must demonstrate ‘readiness’ to LIBOR implications
03 July 2019 London
Image: Shutterstock
Buy-side firms must demonstrate executive ownership and readiness to address the implications of the London Interbank Offered Rate (LIBOR) reform, according to SimCorp an EY.
In an article jointly written by SimCorp and EY, it was noted that the significant consequences and implications for most investment management firms are only just beginning to emerge.
Interbank Offered Rates (IBORs) are being phased out by regulators and replaced by new alternative reference rates (ARR) from the end of 2021.
The article highlighted that there are distractions from near-term regulations such as the Securities Financing Transactions Regulation and Uncleared Margin Rules.
Despite this, it is essential firms start to conduct cross-organisational analysis to understand the impact, according to the article.
It was further outlined in the article that as the reform affects all instrument classes, the market impact will be substantial.
Directly impacted instruments are those that refer directly to one of the affected interest rate benchmarks and will need to change in terms but also in respect of their contractual foundation (for example, derivatives, floating rate notes, and loans).
Meanwhile, indirectly impacted instruments are those using interest rate benchmarks for foreign exchange forward calculations or discounting, the article cited.
It was further added that as floating rate notes and derivatives are the most impacted instrument classes, next to loans, all buy-side firms will be impacted within their investment portfolios.
In the article, the impact was classified into four main areas including portfolio valuation and benchmarks, legal and portfolio documentation, communication, and operations and technology.
The article recommended that buy-side firms must validate that their platform is sufficiently flexible to manage the securities and derivatives structures that are emerging as market standard.
In an article jointly written by SimCorp and EY, it was noted that the significant consequences and implications for most investment management firms are only just beginning to emerge.
Interbank Offered Rates (IBORs) are being phased out by regulators and replaced by new alternative reference rates (ARR) from the end of 2021.
The article highlighted that there are distractions from near-term regulations such as the Securities Financing Transactions Regulation and Uncleared Margin Rules.
Despite this, it is essential firms start to conduct cross-organisational analysis to understand the impact, according to the article.
It was further outlined in the article that as the reform affects all instrument classes, the market impact will be substantial.
Directly impacted instruments are those that refer directly to one of the affected interest rate benchmarks and will need to change in terms but also in respect of their contractual foundation (for example, derivatives, floating rate notes, and loans).
Meanwhile, indirectly impacted instruments are those using interest rate benchmarks for foreign exchange forward calculations or discounting, the article cited.
It was further added that as floating rate notes and derivatives are the most impacted instrument classes, next to loans, all buy-side firms will be impacted within their investment portfolios.
In the article, the impact was classified into four main areas including portfolio valuation and benchmarks, legal and portfolio documentation, communication, and operations and technology.
The article recommended that buy-side firms must validate that their platform is sufficiently flexible to manage the securities and derivatives structures that are emerging as market standard.
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