# Progressive scenario planning for the LIBOR transition Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2020-09-21 Category: BANKING Category URL: https://financedigest.com/category/banking Meta Title: Financial Stability Board: LIBOR Transition Impacts and Meta Description: Discover how banks are navigating the shift from LIBOR to Risk Free Rates amidst market instability. Get insights from leading industry experts. URL: https://financedigest.com/progressive-scenario-planning-for-the-libor-transitionhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/untitled-design-8-1-1736838834563-compressed.jpg) _By **James Gannaway,** Head of Financial Services [Board International](http://www.board.com/)_ The Financial Stability Board have announced that disruption to markets caused by the COVID-19 pandemic must not stop banks from ending their use of the LIBOR interest rate benchmark by the end of 2021. Regulators worldwide have been engaging with the financial services industry to transition markets from LIBOR based interest calculations to Risk Free Rates (RFRs). This is being completed under a framework set out by the [Financial Stability Board](https://www.fsb.org/), representing the world’s largest central banks and regulators for G20 nations. A key focus of reforms is to ensure widely used benchmarks are credible and robust. Regulators are clear that this means benchmarks should be based upon transactions. One of the most commonly known of these benchmarks is LIBOR, which is referenced by trillions of dollars’ worth of financial products, and used for calculating interest payments on bonds, loans, [credit cards](https://www.financedigest.com/what-happens-to-credit-card-debt-when-you-die.html "What happens to credit card debt when you die") and mortgages. As LIBOR underlying transactions have diminished, regulators have announced a target [date to replace LIBOR and begun the process of identifying and creating alternative rates](https://www.financedigest.com/moodys-flags-oct-21-as-crucial-date-for-uk-rating.html "Moody’s flags Oct 21 as crucial date for UK rating").  However, these rates are [structurally different from LIBOR and it is unclear how existing products](https://www.financedigest.com/strong-performance-of-investec-lowes-structured-product-maturities.html "Strong performance of Investec / Lowes structured product maturities") referencing it will change, and what new products will emerge.  There is a possibility of significant customer and [economic impact and uncertainty](https://www.financedigest.com/combatting-economic-uncertainty-in-2023-with-the-payments-sector.html "Combatting economic uncertainty in 2023 with the payments sector") over how this will develop. The transition represents one of the biggest [changes in the financial services industry](https://www.financedigest.com/a-mindset-change-is-needed-in-the-financial-services-industry.html "A mindset change is needed in the financial services industry") ever, with an estimated $300tr of LIBOR global activity, covering derivatives, loans, bonds, trade, and working capital. Lenders and borrowers – will need to make changes in the months and [years ahead](https://www.financedigest.com/global-stocks-to-grind-higher-lacklustre-year-ahead-reuters-poll.html "Global stocks to grind higher, lacklustre year ahead: Reuters poll"). According to a paper from TCS, The End of the Road for LIBOR: Handling the Impact on the Financial World, readying for LIBOR transition will require banks to conduct a meticulous due diligence exercise to understand their current portfolio of LIBOR-linked products, exposures, services, operations and strategies. TCS [say Banks](https://www.financedigest.com/swiss-national-bank-raises-rates-says-bank-crisis-stopped.html "Swiss National Bank raises rates, says bank crisis stopped") would do well to start early and draw up a detailed strategy to transition to the new benchmark taking into consideration their individual agile and digital maturity. Whilst uncertainty around the [end of LIBOR continues](https://www.financedigest.com/factbox-europes-travel-disruption-set-to-continue-as-summer-ends.html "Factbox-Europe’s travel disruption set to continue as summer ends") to exist, the assumed base case scenario has to be LIBOR discontinuation for all currencies after 31 December 2021. This assumes a transition from LIBOR to alternative reference rates (ARRs) before the end of 2021. If there is still an inventory of LIBOR transactions at that point, there will be large [operational and value transfer risks if LIBOR](https://www.financedigest.com/libor-reform-should-trigger-a-major-reassessment-of-corporate-treasuries-data-operations.html "LIBOR reform should trigger a major reassessment of corporate treasuries’ data operations") were to be discontinued. In this scenario, there may be a potential pressure for an extension, probably combined with a [stop on any new LIBOR-based products](https://www.financedigest.com/carlsbergs-poland-unit-could-stop-production-lack-of-co2-threatens-food-industry.html "Carlsberg’s Poland unit could stop production; lack of CO2 threatens food industry"). Any extension, however, has been rejected by several [regulators and it would be risky to plan](https://www.financedigest.com/uk-poised-to-ditch-plans-to-empower-tech-regulator-ft.html "UK poised to ditch plans to empower tech regulator – FT") on this assumption. So how is it possible to model for [future and entirely unknown scenarios](https://www.financedigest.com/extracts-and-distillates-market-overview-high-demand-recent-trends-future-growth-business-scenario-technology-2022-2029.html "Extracts and Distillates Market Overview, High Demand, Recent Trends, Future Growth, Business Scenario & Technology 2022-2029"), what needs to happen, and what does progressive scenario planning for the LIBOR transition look like, as any deadline starts to creep closer? In a 2018 paper, [LIBOR transition: Setting your firm up for success](https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-libor-transition-ibor-benchmark-report-digital.pdf), Deloitte say Boards at Financial Services organisations should consider the following three steps for setting-up a LIBOR transition programme: Firstly, mobilise a cross-business unit and geography transition programme, with C-level sponsorship. Deloitte [say that in addition to accountable](https://www.financedigest.com/midlands-accountants-say-its-never-too-early-to-get-financial-protection.html "MIDLANDS ACCOUNTANTS SAY IT’S NEVER TOO EARLY TO GET FINANCIAL PROTECTION") transition outcomes and activities, this must include accountability for decision making; for example, decisions on the timing of new product launches, or when to engage and transition certain customers. Secondly, [set out a transition](https://www.financedigest.com/pradas-lorenzo-bertelli-sets-out-soft-transition-to-new-leadership.html "Prada’s Lorenzo Bertelli sets out ‘soft transition’ to new leadership") roadmap. Deloitte’s paper highlights how LIBOR transition programmes should include various activities, but just as important a roadmap must identify [key market and regulatory developments](https://www.financedigest.com/automotive-actuator-market-key-manufacturers-development-trends-and-competitive-analysis-2028.html "Automotive Actuator Market Key Manufacturers, Development Trends and Competitive Analysis 2028") and milestones and track these. It may not be possible to take decisions or actions until specific developments occur, which will affect the pace of transition. ![James Gannaway](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/jg-hitachi-1-002-450x300-1736838834212-compressed.jpg) James Gannaway Thirdly, identify the [risks and implement mitigants](https://www.financedigest.com/new-isla-standards-provide-the-foundation-for-resource-optimisation-efficiency-and-risk-mitigation.html "New ISLA Standards Provide the Foundation for Resource Optimisation, Efficiency and Risk Mitigation") early. There are significant risks for LIBOR transition that leadership should be confident are being addressed. It’s vital to agree the [mitigants to these risks](https://www.financedigest.com/ai-holds-the-key-for-both-competitive-advantage-and-risk-mitigation-in-2022.html "AI holds the key for both competitive advantage and risk mitigation in 2022") and, subsequently, ensure that the effectiveness of mitigants is reported to leadership. Given both the uncertainty and complexity involved, the LIBOR transition, will be one of, if not THE biggest transformation for the financial sector ever. It’s never happened before so there is no existing experience or roadmap for what different look like. Traditional [Business Intelligence](https://www.financedigest.com/social-business-intelligence-market-to-reach-a-valuation-of-us29-bn.html "Social Business Intelligence Market to reach a valuation of US Bn") (BI) approaches and tools are essentially useless for trying to model what comes next for LIBOR, as they typically rely on data from what has happened in the past. Indeed, as far as LIBOR is concerned, relying on any existing BI tool, is the equivalent of looking in the rear-view mirror, as a huge truck hurtles fast towards your windscreen. The good news is that instead of relying on traditional rear-view mirror approaches, technology now exists to better understand LIBOR data points and milestones, and analyse different [potential futures](https://www.financedigest.com/future-market-insightss-detailed-report-on-cat-litter-market-offers-projections-of-potential-impact-of-corona-virus-outbreak.html "Future Market Insights’s Detailed Report on Cat Litter Market Offers Projections of Potential Impact of Corona Virus Outbreak") to understand implications for LIBOR strategy, operations and value transfer, and take control of important LIBOR decision-making. Milestones and mitigants can be scenario planned in unlimited [LIBOR-transition plan versions and scenarios, including both operating and financial plans, making it easy to track the evolution of LIBOR transition plans over time](https://www.financedigest.com/in-line-transit-time-ultrasonic-flow-meters-sales-are-set-to-be-valued-at-us-337-5-mn-in-2021.html "In-Line Transit Time Ultrasonic Flow Meters sales are set to be valued at US$ 337.5 Mn in 2021") and compare them with potential results. It’s now possible to directly modify any LIBOR transition data model, during any planning or forecasting process throughout an entire [integrated business](https://www.financedigest.com/the-collective-power-of-partnerships-integrating-payment-solutions-to-drive-business-success.html "The collective power of partnerships: integrating payment solutions to drive business success") planning flow, with the right decision-making platform. A newly created specialist [business unit, such as the cross business, multi-geography LIBOR business unit outlined by Deloitte, or a game-changing decisions about existing LIBOR aligned products, or new ARR products, a new market or regulatory development, or modelling for different investments, can all be inserted in a controlled way during the LIBOR transition planning cycle, simulating the effect of any new transition scenario on the whole business model](https://www.financedigest.com/apis-open-banking-and-new-business-models.html "APIs, Open Banking and New Business Models"). The path to transition away from LIBOR is complex, and there is no one [size fits all approach based on pre-existing business](https://www.financedigest.com/covid-19-is-impacting-the-variable-speed-drive-market-size-business-revenue-forecast-leading-competitors-and-growth-trends-2028.html "COVID-19 Is Impacting The Variable Speed Drive Market | Size, Business Revenue Forecast, Leading Competitors And Growth Trends 2028") intelligence tools. New alternative rates will be calculated on a different basis to LIBOR, everyone impacted is at different stages of transition, [moving at different speeds towards](https://www.financedigest.com/the-biopesticides-market-to-move-towards-constructive-advancements.html "The Biopesticides Market To Move Towards Constructive Advancements"), different outcomes. The consequences of [reform](https://www.financedigest.com/explainer-how-britain-is-exploiting-brexit-to-reform-finance.html "Explainer-How Britain is exploiting Brexit to reform finance?") are unpredictable and may have an adverse impact on financial instruments linked to any of these benchmarks. But the financial [sector](https://www.financedigest.com/how-embedded-insurance-can-drive-growth-and-value-for-the-insurance-and-finance-sectors.html "How Embedded Insurance Can Drive Growth and Value for the Insurance and Finance Sectors") can embrace a new approach to scenario planning, capable of modelling various and new unknown scenarios looking forward, rather than pre-existing approaches based on rear-view mirror intelligence looking backwards. The LIBOR transition, has the potential to highlight how some companies lack the processes and tools to make [rapid decisions to address change](https://www.financedigest.com/rapidly-changing-fashion-lifestyle-is-expected-to-spur-demand-for-clothes-closets-market.html "Rapidly Changing Fashion Lifestyle Is Expected To Spur Demand For Clothes Closets Market"), but it doesn’t have to be this way, and instead can usher in a new era of progressive scenario planning for financial service organisations who get it right. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---