It’s also worth highlighting that IBOR transition could encourage developments in disruptive technologies, cloud computing and artificial intelligence to help with valuations or enable more flow-driven or algorithmic trading. This could shake up the market, even beyond the basic IBOR transition impact. We estimate that upwards of 10%-15% of larger asset managers and asset servicers are considering providing solutions in the IBOR space, as well as adjusting their own investment and hedging models.
Another good reason for maintaining flexibility is the buy-side’s dependency on the sell-side’s response. Banks are assessing the impact of IBOR transition on their own cash and derivative products and services, but they face significant time pressures in providing the liquidity the buy-side needs.
At the other end of the value chain, pension funds, corporates and other clients must also respond to the IBOR challenge – clarifying their own needs and preferences. This is another good reason why WAM firms need to be proactive in holding conversations with clients; helping them understand the scale of the transition, and the importance of both agreeing new contract terms in good time and embracing new products.
Clearly, the scale of work triggered by IBOR transition is significant. Some firms believe that most IBOR transition costs for the WAM sector could arise from reprioritizations within the business – actions taken to avoid the major costs that would otherwise be incurred. Others hint at the significant costs of installing new fall-back provisions, modes of disclosure or securing client consents.
For example, to address legacy contracts referencing IBORs after 2021, firms will need to put substantial effort into repapering contracts. They will also need to invest in new systems to revalue instruments and manage risks, and consider potential accounting and tax repercussions. Such actions combined could well result in program structures similar to those incurred by MiFID II compliance – or in some cases, possibly even exceeding them.
Overall, WAM firms will need some 10 different work streams to address all necessary issues. These would cover:
- Overall project/program delivery and planning
- Governance, risk and controls
- Market liquidity and uncertainty modeling
- Enterprise risk management
- Valuation and risk management
- Product design
- Legal issues
- Operations, data and technology
- Accounting and tax
- Client communications
Many firms have been slow to get started with IBOR transition activities. Only around 35% of leading asset managers have identified the senior management and governance structures they need. The figure is likely to be far lower for wealth managers, pension funds and corporate entities.
Asset managers who are the most prepared at this juncture tend to be US headquartered or bank and insurance captives, and liability-driven investing firms employing OTC derivatives, inflation swaps, cross-currency swaps and floating rate note money markets – all of which are impacted by IBOR transition. Larger wealth managers, which could also feel the impact through structured products, packaged loans, complex products and securitizations, are also starting to perform their impact analysis. However, small and medium-sized firms and wealth managers have tended to focus on other competing priorities with closer deadlines.
Those firms yet to prioritize IBOR will need to do so over the next few months, assess what impact the transition to ARRs is likely to have on their business and plan their response accordingly. They need to consider the impact on the broader ecosystem, communicating with banks, issuers, financial market infrastructures and enabling vendors.
Whatever response they settle on, it needs to be one that’s future-flexible – and allows them to make the most of all available opportunities. By doing so, firms should eventually find themselves counting the benefits, rather than the cost of the IBOR transition.