5 minute read 12 Aug 2020
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7 steps to get ready for the end of IBOR

The benchmark rates that underpin the international financial services industry are changing. Here’s what you need to do to prepare.

The transition from the current Interbank Offered Rates (IBORs) to Alternative Reference Rates (ARRs) as the primary benchmark floating rates for financial contracts around the world is under way. This change is a certainty, not a choice.

Regulators in both the US and the UK recently put out an urgent call for all financial market participants to start actively reducing their exposures to IBORs and transition to products referencing ARRs so that there is minimum disruption to the global financial markets.

But while there has been substantial progress by working groups across all the major currencies in selecting alternative rates and educating the market about them, we’re still seeing significant complacency. Many firms still harbor the misplaced hope that IBORs will continue significantly beyond the 2021 deadline set by the Financial Conduct Authority (FCA).

Firms need to take action now. The pace of change is picking up and we expect boards, investors, borrowers and other stakeholders to increasingly press for updates on how prepared businesses are for the transition.

So what should your firm be doing today to get ready for the change? Here are seven steps to preparing your business for the end of IBOR:

1. Assemble an IBOR transition team

Start by identifying and nominating a senior executive who will be responsible for assessing, planning and coordinating all IBOR transition activities across the firm. Their focus should be on making sure the company is proactively delivering a smooth and orderly transition to ARRs for new business and monitoring and managing exposures to legacy contracts.

To support them, select sponsors from all impacted core lending, investing, trading and hedging business lines, as well as enterprise functions such as legal, finance, risk, analytics, and technology. Together, this cross-functional team can coordinate transition activities across the enterprise, identifying and allocating resources where necessary.

2. Conduct a comprehensive impact assessment

The IBOR transition team should begin with an impact assessment covering all areas of the business that are exposed to IBOR. This should start with a product assessment – identify any products linked to IBOR and assess their exposure and maturity profile. From a legal perspective it also will be critical to analyze the contractual language of the impacted products – especially their fallback triggers and rates.

The team should also carry out an impact assessment of business processes. Some processes and applications – from pricing, hedging and risk models to end-user computing tools – will require updating, redevelopment, testing and re-validation. If your firm is dependent on a third-party provider for any of these, you also need to find out what IBOR transition plans they have in place.

Finally, the team should identify what impact the shift to ARRs will have on the risk profile of the firm. Will it increase your business’ operational, reputational, or legal risk? Could it impact your existing and future financial resources – earnings, capital, funding and liquidity?

3. Create a plan for legacy contracts and start developing new products

With your impact assessment complete, you should compile an inventory of legacy contracts that mature after the 2021 deadline (or 2019 for those linked to Euribor). Start by addressing the risk of an ongoing exposure to IBOR, especially by working with clients and counterparties to update the fallback language and risk disclosure documents.

To support new products, you will need to start developing the necessary contract and fallback language, build new models for pricing and risk, and undertake the required operations and technology changes.

Where possible, seek to minimize your IBOR exposure by moving new products to ARRs early. Indeed, being in a position to offer new products and financial instruments linked to ARRs could give your business a commercial advantage during this transition period.

4. Define an enterprise-wide governance framework

Your IBOR transition team should provide regular updates on the firm’s existing exposure to IBOR-linked products to both the board and executive management, as well as keeping them abreast of progress in shifting to ARRs.

For this to be effective, the board and management will need a framework to evaluate progress. The transition team therefore should seek to define the terms of reference and develop key milestones and performance indicators, as well as a transition roadmap, and preliminary resource and cost estimates.

5. Launch an internal communications program

For the transition to be a success, it’s vital for all internal stakeholders to heighten their awareness of the risks, issues, and challenges of the transition away from IBOR. The client relationship management team, in particular, will need to be well prepared so they can proactively engage in discussions with retail and wholesale client end-users of IBOR-linked products.

To improve overall internal awareness, communicate the transition plan timelines, the potential impact on end users, and the operational mechanics of repapering and repricing existing financial contracts to colleagues throughout the firm.

6. Develop an external communications plan

One of the most critical steps is defining a client outreach and communication strategy for your external stakeholders so that you can outline the potential impact of the IBOR transition on any activities with your firm. This communication should go beyond your customers to include counterparties, investors, rating agencies and even regulatory agencies.

You should also look to coordinate with industry working groups to define the collective versus firm-specific communication plan. This should take into account any potential anticompetitive issues that could emerge.

7. Evaluate your execution

Prepare for an examination to assess your organization’s readiness to transition from IBORs to ARRs. This should factor in both internal and external reviews – including engaging with industry trade associations and public bodies. For example, how prepared are you to respond to data requests on IBOR exposure and risks from global regulators?

Closing the gap on ARR readiness

As highlighted in the International Swaps and Derivatives Association (ISDA) survey (pdf), there is a significant gap between awareness and action when it comes to gearing up for the transition away from the IBOR. 

While many organizations have been slow to get moving, there is growing need for urgent action. With every new IBOR trade executed, the more costly and complicated it will be for companies when the reference rate is eventually phased out in 2021.

By getting the right team in place, kicking off an impact assessment and establishing program governance, your business can not only be well prepared for the transition – but even be positioned to profit from it.


The transition from IBORs to ARRs is a certainty and regulators are calling for participants in financial markets to take urgent action to prepare – yet complacency persists. Firms should be planning for the change if they are to be ready in 2021.