Banking Crisis
LIBOR – A $300 Trillion Problem. What Wealth Managers Must Do

This is a second article by an author who asked the wealth management sector whether it was ready for the end of the LIBOR inter-bank interest rate regime. The article is a guide for firms on the practical steps they need to take in coming weeks and months.
A benchmark that provided the anchor for financial products
around the world, counted in trillions of dollars, is falling out
of use following a major scandal and reforms to how market
interest rates are set. We welcome back an author on the subject
to consider what practical steps wealth managers should take to
adapt to the new landscape.
In this article, Tej Dosanjh, managing partner, UK, for Evolution
Partners, explores specific ways that the wealth management
industry can adapt to post-LIBOR ways of setting interbank
interest rates. (See a
previous article about the matter here.)
Evolution Partners is a managing consultancy which operates in a
number of countries.
The editors of this news service are pleased to share these
insights on such an important topic. As ever, the usual editorial
disclaimers apply to comments from outside contributors. Join the
debate! Email tom.burroughes@wealthbriefing.com
and jackie.bennion@clearviewpublishing.com
Recently we discussed the effect of LIBOR cessation for the
wealth management sector. To recap, all portfolios that hold a
LIBOR related instrument will be affected. Whilst the most
material risk lies with positions maturing after 31 December
2021, transactions with a shorter maturity are also at risk if
LIBOR rates were to cease prior to the end of 2021 and any
fallback mechanisms in contracts were to be triggered - sometimes
these fallback rates result in a significant risk/valuation
change to the relevant position. Impacted products include
private debt, fixed income bonds, derivatives and other
overlays.
The regulators are looking for evidence of exposure
identification and management, client education and outreach,
product management and conduct risk mitigation. Firms need to
ensure that relationship managers, sales and distribution
professionals, portfolio managers and operational staff are fully
trained and sufficiently aware of the post-LIBOR operating
environment.
In this short article we drop into some of the detail of what you
need to do.
The first step is to get a project up and running, of which
internal sponsorship is key to ensure focus, a sense of urgency
and momentum. A common risk is that this is being handled by
someone else, either a sell-side partner or another internal
function - this assumption will be costly. The chief executive or
member of the executive team should be the sponsor or at least be
aware. Our experience suggests that advanced firms are ensuring
that business management (i.e. the front office) takes ownership
and accountability for driving change, whilst others will treat
this as another regulatory project to be managed by technology,
operations, legal and compliance. Either way the project needs
strong governance and oversight, potentially at board level (or
Senior LIBOR Steering Committee). Critically, a senior executive
covered by the Senior Manager Regime (SMR) should be accountable
for the transition.
The scope should include:
-- Client engagement and communication planning - Develop
and implement an enterprise-wide strategy with clear objectives
to proactively engage, communicate, and increase levels of
education with impacted clients.
-- Identify and validate exposure - Quantify and develop a
flexible approach to monitor LIBOR-linked assets and exposures
through the transition period. Obtain or develop capabilities to
value ARR-based products where transitioning to using those
products.
-- Risk management - Identify, measure, monitor and control
financial and non-financial risks of transition, establishing
processes and oversight routines for ongoing management.
-- Contractual remediation impact - Understand the
financial, customer, and legal effects resulting from
transitioning from LIBOR via fallbacks, and plan mechanisms for
implementing those fallback provisions.
-- Develop product and portfolio strategy - Develop a
strategy for redesigning or transitioning the existing portfolio
of LIBOR products, where needed, including considerating using
new products based on ARR. For portfolios tied to LIBOR as a
benchmark or investment guideline, understand implications for
the forward portfolio and transition where appropriate.
-- Develop operational and technology readiness plan -
Develop a plan to address the operating model, technology effects
and data implications required as a result of LIBOR transition,
including with respect to vendors.
-- Accounting and reporting - Determine the technical
accounting considerations along with related reporting
considerations, including fund performance and customer
statements.
-- Taxation and regulation - Determine the applicable tax
and regulatory considerations along with related reporting
consideration.
-- Employee engagement and training – Ensure that the firm’s
staff are aware of key LIBOR issues including conduct risk.
Arguably, the two most critical tasks are client engagement and
employee engagement - you have immediate control of both.
Firstly, you have a fiduciary responsibility to discuss and
manage the impact of this change and how your firm is going to
ensure regulatory compliance in the best interests of your
clients. And this must be clear. Similarly, you need to ensure
that all employees are fully aware of the changes needed and
trained for the future of the non-LIBOR world in your
organisation. The regulator will be looking for evidence of
this.
Now. The amount of work to be done across these areas will vary
massively depending on the complexity of your firm. By this it
could mean the product and service proposition; the number of
external multi-manager arrangements you have compared with your
own internal in-house investment team; the amount of lending or
derivative products you offer; or whether your technology
platforms are operated by a third party or internally built -
amongst many other criteria.
The first task in the project is to understand the size of the
problem by conducting an impact analysis or ‘Diagnostic’. This
consists of a short exercise with all organisational functions
involved who can contribute to complete a list of “things” to
change or fix. From here you can develop a broad idea of
the type of skills you will need, be it legal, tech based,
operational or other. Finally, you can develop a plan that
addresses your LIBOR migration approach – organisation wide.
Then, execute.
Once the project is underway, ensure complete transparency with
senior stakeholders in terms of progress against plan and
potential issues and blockers. The end date is fixed, so the
sooner you can ask for help when needed the better your chances
will be of getting over the line.
We said this in our last article. The clock is ticking and there
is time to act, but you need to start now.