They impact everything from bonds to loans to mortgages.
And while the December 2021 deadline for financial services companies to transition from a variety of traditional Interbank Offering Loans (IBORs) to new near Risk-Free Rates (RFRs) may seem a long way off—guess again.
The organizational and technological considerations were challenging enough under ordinary circumstances. Then COVID-19 struck. Today, ordinary is out the window and every organization now faces a new sense of urgency to accelerate the transition to RFRs in a world where many employees are working from home, but stringent regulations haven’t changed a bit.
It’s against this backdrop that we’re already starting to see a number of trends among our clients who are actively transitioning. In particular, we’ve found that the answers to these three questions have been a good starting point for financial services institutions’ (FSIs) management to ensure that their transitions are on track or can be re-evaluated to bring back the focus and business agility to achieve IBOR transition in the most cost effective and automated manner.
Question 1: Are your program organization and program/project plans still fit for purpose?
Better planning leads to better results. According to the Project Management Institute’s “Pulse of the Profession” survey, more than 11% of project budgets are wasted due to poor project performance. Meeting objectives and the intention of a project can depend on the organization’s maturity and experience.
Successful business outcomes begin with a clear understanding of expected results and depend on rigorous planning, skillful execution and the agility to assess status and course correct as needed. COVID-19 has compounded the challenge as working environments increasingly shift from working on-premises to work-from-home.
Since IBOR programs were set up before COVID-19, successful organizations more than ever need to review their key objectives, critical path, timeline, program governance and regulatory adherence, as well as availability of resources to perform vital program activities.
Work relying on heavy manual effort as well as a dependency on staff resources needs to be reviewed and more efficient solutions considered. For example, automated or artificial intelligence (AI) solutions that help with contract repapering are now in higher demand. With these automated solutions, staff can better focus on more value-add—instead of repetitive—tasks where their attention is required while also keeping the overall IBOR programs on track.
We’ve already seen the diversity of program and project team structures increase, including more flexible models for full-time and part-time project resources, internal and external workforces and remote working models implemented to ensure an ongoing collaboration within project teams.
Question 2: Are there more efficient ways to review your contracts and perform contract remediation?
Past is prologue. A key aspect of each IBOR transition program is the handling of legacy contracts. A detailed contract analysis is required to understand any fallback languages and to address remediation activities. FSIs face unique challenges due to the high volume of contracts in scope, decentralized storage, limited inventory and inability to fully access contracts digitally.
Solutions have already included:
- Using AI to automate contract classification and indexing.
- Extracting key contract terms from disparate contracts.
- Automating required contract amendments and remediation activities.
- Automating workflows to perform client outreach and contract execution.
By introducing these and other technology solutions, FSIs can better perform their IBOR transition activities without as much dependence on resources across finance, risk and compliance and legal teams. The result? Faster and better program delivery with up to 65% cost savings, while simultaneously increasing the accuracy of re-papered IBOR contracts by more than 90%.
Question 3: How are you limiting conduct risk as part of your client engagement approach?
Don’t leave risk to chance. Conduct risk is one of the major challenges facing our clients’ IBOR programs as they transition to RFRs. This is a prime focus area for regulators, so more than ever, FSIs need to deploy proactive, productive and proven approaches when managing conduct risk as part of their IBOR transition client engagements.
Other challenges include treating customers equally, educating client-facing staff members, internal and external communication, and record-keeping, as well as managing conflicts of interest.
An even more basic challenge? Client disengagement. Getting clients’ attention during today’s global pandemic is proving especially challenging with many organizations facing multiple must-do tasks, deadlines and regulatory pressures in a world where COVID-19 is rapidly changing workforces and workplaces.
That said, we’re seeing success stories. Several FSIs we work with have already thoroughly planned their client engagement approaches and have begun outreach activities.
Key success factors include:
- Implementing solid governance for key required activities.
- Adjusting conduct risk management frameworks with an eye to specific IBOR challenges.
- Aligning efforts with different business lines, products and geographies.
- Providing sound staff training and education.
- Applying clear client engagement models and protocols across business lines and functions.
Finally, perceptions matter. Business and client relationship managers need to provide clients with RFR options—not advice—scrupulously avoiding any conduct risk issues. And speaking of perceptions, as mentioned earlier, if you still think the December 2021 deadline is far enough away to put your RFR transition on the back burner, think again.
COVID-19 is changing how FSIs operate—often for the better. Transitioning from IBOR to RFR is not just a requirement that must be met; it’s also an opportunity to implement better processes, systems, solutions and services today to emerge stronger tomorrow once this pandemic is finally behind us. We all can’t wait for that moment. But we shouldn’t wait to prepare, either.
One final thought: Be prepared and adaptable. Seize the market opportunities. Realize the value from executing your IBOR transition—NOW.