Authored by – Joris Hillebrand, Managing Director - Business Consulting and
Daniel Percy-Hughes, Principal Consultant
IBOR replacement: How technology can contribute to a smooth transition
Over the last decade, global banks and insurers have been met with the challenge of keeping up with a new and changing regulatory regime for financial services. With a plethora of regulatory changes on the horizon, and scandals relating to the London Interbank Offered Rate (LIBOR) exposing the benchmark’s vulnerability to manipulation, firms must prepare for a shift toward more benchmark transparency to enhance stability in the market as well as for the phase-out of these so-called IBORs.
Benchmarks are critical to the financial system as most financial contracts are executed - directly or indirectly, through valuation - on the basis of benchmark values. Investors must have confidence that their contracts are executed faithfully and that there is stability in the market. However, multiple rigging scandals were exposed from 2010-2014, resulting in a massive increase in the scale of regulatory risk, fines upward of $100 billion globally and more expensive operational controls around benchmark processes. While alternatives are sorted, the Financial Conduct Authority has pushed to move away from GBP LIBOR by the end of 2021, with other LIBOR currencies and EURIBOR in its current form following suit. Firms surely will have a sizeable feat ahead of them to prepare for this transition. They must ensure compliance is met and that the benchmarking transition runs smoothly and without negative consequence on business. For this, they must assess where they are today, determine the impact on existing contracts and how they can look to apply innovative solutions using data science to help facilitate a more seamless transition.