Time is of the essence to build the necessary analytical capabilities. IBOR transition at its core is an analytical problem, with substantial operational, legal, infrastructure, and management implications due to the complexity and the reach of the issue. The transition is rapidly approaching, and the risks explained in this paper could easily materialize if the program is executed without a reliable radar
IBOR transition (see notes), the mother of all financial services infrastructure transitions, has taken a backseat to all the major developments from COVID-19. However, this massive structural change hurtles ahead and is on course to fundamentally alter many facets of financial intermediation and capital markets.
Financial institutions are apprehending the need to imminently accelerate progress on IBOR transition, despite the long list of to-do’s and emerging risks brought about by the pandemic and its financial/economic implications. The technology and operations implementation has been running for some time, however, institutions need to speed up and finalize decisions about the existing book as well as new business. There is a large set of analytical capabilities that are needed to effectively make myriad pending decisions, while ensuring downside protection against financial and non-financial risks. The transition is in the end a change of cashflows and will inevitably result in value and risk transfer between financial institutions and their clients/ customers/counterparties. In addition to obvious financial risks, the transition also creates non- financial risks such as conduct, operational, regulatory, compliance and reputational risks.
Many institutions are employing overly simplistic approaches, relying on non-risk based metrics (e.g. notional balances) to assess impact and drive decisions. There isn’t enough focus on quantifying value and/or risk transfer across the bank based on common methodologies with the underlying belief that individual business units will “do what is best” without well-defined centralized analytical frameworks. We strongly believe that successfully managing the transition and the numerous associated risks necessitates developing robust analytical capabilities in a coordinated manner. Without the right analytics capabilities, financial institutions will fly blind in the IBOR transition storm and face significant risks.