Treasurers need to limber up for Libor reform
Benchmark reform may have received a lukewarm welcome from corporates, but treasurers would be well advised to quantify their Libor exposures to avoid nasty surprises during the transition to alternative overnight risk-free rates.
The Financial Conduct Authority (FCA) is just one regulator that has directed firms to move away from the use of benchmarks such as the London interbank offered rate (Libor) in favour of alternative overnight risk-free rates.
The problem for corporate treasurers is that while Libor will receive what the FCA describes as limited support after 2021, trillions of dollars of IBOR or interbank offered rate-related transactions will not have matured by then.
Sangdeep Bakhshi, who works for EY advising corporate clients on interbank offered rate reform, says companies need to know what their inventory is in order to determine how benchmark reform will impact their organization. “For example, we know that derivatives are impacted, but Libor is also referenced in some commercial contracts,” he says.
One of the significant challenges related to reporting is how firms are going to handle the hedging treatment and its impact on financials and reporting, explains the head of KPMG’s Financial Services Risk & Regulatory Insight Centre, James Lewis.
One of the main longer-term considerations is how to account for replacement of interbank offered rates when the changes take effect.