BY Fraser Tennant
Over three quarters (77 percent) of financial institutions (FIs) do not have a comprehensive plan in place for transitioning from the London Interbank Offered Rate (LIBOR), according to new report by Duff & Phelps.
A key part of the financial services infrastructure, LIBOR is a globally recognised base rate for pricing loans, debt and derivatives and has been called the “world’s most important number”.
According to the report, based on a survey of private equity firms, professional service providers, hedge funds, banks and others, while 54 percent had identified LIBOR exposures, they had not yet taken necessary action to resolve their liability.
Furthermore, 58 percent of these firms had not catalogued transition provision and 42 percent said they were unsure of what to do next. Almost a quarter (23 percent) of the firms surveyed have not begun any formal processes to identify exposure, with 14 percent suggesting they would not be ready until Q1 2022 at the earliest.
“The LIBOR transition is one of the greatest regulatory-driven changes ever, and inevitably it requires complex planning, thought and analysis,” said Jennifer Press, a managing director at Duff & Phelps. “It is therefore quite surprising to see that just nine months away from the hard deadline, the majority of financial institutions who were polled do not have a comprehensive plan in place.”
A failure to adequately prepare for the LIBOR transition – which is due to take place on 31 December 2021 – could lead to significant risks for firms as contracts transition to alternative reference rates.
However, a third of respondents revealed a belief that they are on track, despite limited progress across the majority of the industry. However, the report notes that firms may be underestimating the extent and complexity of the work required for a successful transition.
“The results indicate that although the majority of firms have identified their LIBOR exposures, many have yet to formally catalogue the transition provisions,” said Marcus Morton, a managing director at Duff & Phelps. “There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate.”
Rich Vestuto, a managing director at Duff & Phelps, added: “Technologies such as natural language processing and artificial intelligence could go a long way to help firms fully understand their exposure, but they must start the process now.”
Report: LIBOR transition survey