In news that will no doubt be music to the ears of global regulators, a new survey by Moody’s Investor Services finds that the majority of global banks, asset managers, and insurers are on track with their plans to migrate from Ibor-linked benchmark rates to alternative reference rates (ARRs) at the end of 2021, despite the disruption caused by the coronavirus pandemic.
Moody’s surveyed 85 global banks and non-bank financial institutions (NBFIs) to gauge their preparedness for the phasing out of the Ibor benchmark. All of the financial institutions surveyed this year said they now have transition plans in place, compared with a year ago when only around two-thirds of banks, and one-third of non-bank financial institutions had plans. The majority of those surveyed said that Covid-19 disruption would not delay the phase-out and only affect interim milestones.
“Respondents highlighted that robust communications with stakeholders will be crucial for the transition and most banks have reached out to affected customers,” says Olivier Panis, vice president – senior credit officer at Moody’s Investors Service. “Most institutions we surveyed still expect transition costs to be split between lenders and borrowers.”
Financial institutions have only 15 months left to migrate from Ibor-linked rates to alternative reference rates, as the global benchmark is phased-out. Around 60% of banks surveyed said they had already issued floating-rate debt indexed to ARRs as well as increased their exposure to both ARR-indexed derivatives and the Sonia benchmark. This was in contrast, however, to NBFIs whose exposure to alternative benchmarks has remained limited.
The absolute exposure of financial institutions to Ibor-linked contracts which should be transitioned by the end of 2021 remains substantial although some “tough legacy exposure” will require bespoke solutions, Moody’s says, adding that among, the key transition challenges that financial institutions face are insufficient liquidity in ARR, implementing fallback provisions and updating systems and models. It adds that while ISDA protocols will be adopted in the coming weeks and clearinghouses will finish migrating price alignment interest and discounting for cleared swaps to ARRs by October, “a main risk [remains] that clients will not update their systems in time”.
Surveyed banks expressed more concerns than NBFIs about adverse valuation impact on Ibor-linked securities. Bank cite insufficient compensation on swaptions under the US and EU scheme, a switch in rates to compounded in arrears, and a lack of liquidity in Ibor-linked products toward the end of the transition. NBFIs are more sanguine, Moody’s says, expecting recommended transition language will limit adverse valuation, though noting that tough legacy positions could face valuation pressure unless a legislative approach is agreed.