Impact of LIBOR Replacement and Step Guide to Step for Smooth Transmission to the Alternative Reference Rates (ARRs).
The accusation of manipulation of LIBOR began again in the 1990s or maybe even earlier, which resulted in the imposition of fines on participating banks and a lack of further trust in the accuracy of LIBOR. However, behind the 'LIBOR Scandal of 2011, the Financial Stability Council (FSB) recommended in 2014 to replace various Ignitions with an alternative reference level (ARR) or as mentioned by several 'risk-free' market participants (RFR) (RFR). Furthermore, financial regulators around the world have actively begun to introduce ARR and provide guidelines for smooth transitions.
The Accusation of manipulation of LIBOR began again in the 1990s or maybe even earlier, which resulted in the imposition of fines on participating banks and a lack of further trust in the accuracy of LIBOR. However, behind the 'LIBOR Scan LIBOR dal of 2011, the Financial Stability Council (FSB) recommended in 2014 to replace various Ignitions with an alternative reference level (ARR) or as mentioned by several 'risk-free' market participants (RFR) (RFR). Furthermore, financial regulators around the world have actively begun to introduce ARR and provide guidelines for smooth transitions.
ECB recommends the use of € STR as the main level but has not announced when Euribor will stop.
Why do Treasures care?
IBORs are a standard reference benchmark for millions of contracts worldwide. According to estimates by Bloomberg, the estimated market value of the underlying contract is more than USD 370 trillion. The termination of the IBORs will have an impact on almost every treasury transaction from your organization regardless of whether it is lent (deposit), loan (loan), investment (bonds), or hedge transactions (derivatives).
ARR implementation will have an impact on the assessment of your existing transactions and determining new transaction prices. Changes in benchmarks will further change the calculation of interest and produce cash flow and completion date. Changes in the interest calculation method may have an impact on your taxation because there may be changes in the value of your debt instrument. Resulting in changes in the accounting method used for ARR to lead to other challenges. In addition to financial impacts, your system infrastructure will be affected because of the implementation of the required ARR.
Impact of Implementation - Alternative Reference Level (ARR)
What should the treasurer do?
- Get used to yourself with ARR and related events, especially the provisions of withdrawing from the existing contract.
- Planning and preparing for the transition to ARRs
- Identification of your IBOR-based exposure and relevant transactions
- Involved with your financial business partners and if possible negotiate existing contracts
- Update your system and infrastructure
SAP System Adaptation
There are already a large number of SAP updates available for the new interest rate calculation method for transactions and money market bonds. Even new features for entering/excluding spread into compounding have been added to the solution. Update for ABS/MBS and drowning bonds is not yet available and is expected to be around Q3 2021.
While the number of affected instruments may not be large for several companies in 2021, ARR is a new convention that will come and USD-LIBORs will follow in 2023. The five steps above must help your organization to understand and manage smooth transitions to ARRs.
We have accompanied and consulted with various clients about the journey of replacing their IBOR and are happy to help your organization.
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