What Does a Migration Away from LIBOR Mean for Financial Services Firms?

NEW YORK NY 21 February, 2018 – According to a new report by global management consultancy Oliver Wyman titled, Changing the World’s Most Important Number:  LIBOR Transition, the Financial Conduct Authority’s (FCA) indication that it will no longer persuade or compel banks to submit rates to calculate LIBOR after the end of 2021 has a potentially broad and significant impact on financial institutions, investors, corporations, and retail consumers. More than $240 trillion in financial products globally use this reference rate, ranging across wholesale and retail products, including corporate loans, floating rate notes, derivatives, mortgages, and other securities.  In addition, the Oliver Wyman report notes that the transition to alternative reference rates will be complex and difficult unless risks and challenges are managed proactively.

The Oliver Wyman report highlights that although alternative reference rates have been proposed for the most used LIBOR currencies, they are structurally different both to LIBOR and to each other, making a seamless transition highly unlikely.

Beyond the financial and operational risks arising from the transition to new reference rates, banks may also face considerable conduct, reputational and legal risk.  Financial institutions will need to clearly define and communicate a justifiable, consistent, and understandable transition approach to customers ranging from large corporations, other financial institutions, and to millions of retail customers.

“LIBOR is a cornerstone of the financial industry today, and a transition away from it would impact a vast array of products, businesses, systems and processes, as well as customers and counterparties. The potential for negative public response, conduct risk, and litigation is very real,” said Serge Gwynne, partner at Oliver Wyman and report co-author.  

Despite the uncertainty surrounding the transition away from LIBOR, the report urges financial institutions to begin preparing for transition.  There are immediate opportunities to engage with regulators and industry bodies to help shape the transition process, and it will be important for firms to be able to quickly assess the potential areas of impact internally.

Early industry estimates are that the cost of transition could be greater than $200MM for some banks – a similar magnitude to recent regulatory change programs such as MiFID 2 and historical transition programs such as the Euro transition and Y2K.  The report urges awareness and action, and recommends that transition planning move rapidly up the management agenda.

“While the discontinuation of LIBOR may seem far away, the magnitude of the transition and potential for financial impact means financial institutions must start mobilizing near term,” said Oliver Wyman partner and report co-author Adam Schneider.
 

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 4,700 professionals around the world who help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

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