LIBOR - Managing the Transition Risks

Plan for complexity and uncertainty. 

Well before the calendar flips to January 1, 2022—when the London Interbank Offered Rate (LIBOR) no longer will be the reference interest rate pegged to a myriad of financial instruments—banks and other financial institutions will need to be far along with the task of making this historic change.

In fact, in our view, if banks have not started, the time is now.

It would not be an exaggeration to suggest that few institutions have begun meaningful effort, which would mean they are risking not being well-prepared to manage the transition’s complexities and risks.

With those ideas in mind, we’ve created an inventory of issues and risks we believe should be examined while preparing a strategy for the transition:

  • Strategic plan – Taking a step back and define a true strategic plan; it will be critical to help ensure the organization goals are established and met.
  • Establish a transition Governance/Project Management Office – Coordinate governance guidelines, organize oversight teams, and assign project ownership for the transition effort. 
  • Create a roadmap, and prepare for having to use significant resources – Navigating a path will be arduous, and the number of people needed will be significant. Don’t underestimate the effort this program requires.
  • Inventory the impact across your organization’s businesses and products – Obtain an understanding of the impacts across business lines and products. Be confident that affected aspects have been considered.
  • Start now on building a thorough communication plan – Confusion and lack of education about the transition is your enemy. Build a comprehensive communication plan. What should it include, and who should receive it?
  • Understand the complexity of contract amendments – Repapering significant volumes of contracts while interacting with clients will be demanding. Do not misjudge the time and effort required.
  • Be certain to understand fall-back language, and its impact – Not all language is created equal. Be sure to seek assistance from your legal department when working on all aspects of affected contracts.
  • Beware of data – Ask yourselves: How available and how complete is our institution’s data? Data is financial oxygen, and therefore it is vital for the health of the business that your data is sound.
  • Test your systems and applications – Since most organizations use an array of systems and apps, this transition period may challenge the resource required to change systems while running the day-to-day environment. Can you identify vendor support system risks? Are you confident that the institution can sweep the code to find the LIBOR/reference rate occurrences?
  • Test your models – Are you comfortable that the organization’s models can handle the transition’s needs?
  • Break down the silos – Are your accounting and tax specialists talking to each other about the impending impacts affecting both organizations? How about internal audit and risk management personnel?

Any change to the size, scale, and breadth of the LIBOR termination is bound to be fraught with challenges and risks. Playing catch-up is dangerous. Starting now is the smart play.


KPMG is the Sapphire Sponsor at RMA’s GCOR XIII, April 10–11, 2019.  Mark A. Twerdok, Partner, KPMG LLP, and Khuram Babar, Director, KPMG LLP, will speak more on this LIBOR topic during their LIBOR breakout session on Wednesday, April 10.  For more information and to register for GCOR please visit the GCOR website, https://landing.rmahq.org/gcorxiii.

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. [Printed in the US].  Content that displays the KPMG logo or uses the KPMG name shall include the following trademark ownership statement, once.  The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

 

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