Disruption isn’t always bad. It often spells opportunity for firms that turn it to their advantage. London Interbank Offered Rate (LIBOR) is the benchmark for US$350 trillion in financial contracts, and it will effectively be phased out in 2021. Asset managers face particular challenges from this transition, including their diversity of asset classes, dependence on third parties, and complex investor base. But there are also opportunities to use this shift to enhance products and profitability.
Asset managers during recent decades have heard warnings about disruptive challenges such as new market entrants and changes threatening incumbents. Yet firms can gain by approaching disruption as an opportunity. And disruption is on the horizon: LIBOR, the benchmark for US$350 trillion in financial contracts worldwide, will effectively be phased out in 2021. Leading asset managers will use this change to update systems and processes, demonstrate their client focus, and pursue new market opportunities.
The challenges of LIBOR transition span a firm’s functions, including investment strategy, valuation and risk, operations, and communications. Asset managers face particular challenges during the switch to alternative reference rates because of the industry’s structure and purposes. Many firms cover a variety of different asset classes, in different geographies, through multiple strategies. Also, most asset managers rely heavily on a range of external organizations, from custodians and administrators to pricing vendors, co-investors and sub-advisors. They’ll need close coordination during the transition. Finally, firms often need to serve a wide variety of investor types with different interests, including institutional and retail customers.
First movers are beginning to treat LIBOR’s end as an opportunity to improve operations and relations with clients, shareholders, and employees. They’re using scenario planning and starting to make changes that will be needed regardless of the outcome from LIBOR transition. Such steps include updating contracts; educating stakeholders; determining what changes might be needed to infrastructure, products, models, and policies; testing; and more.
An asset manager can capitalize on the need to switch to alternative reference rates by promoting collaboration, agility, innovation, and efficiency across its business. Such streamlining can empower staff, facilitate decision making, and reduce costs. This could help you innovate products based on the new reference rates. There are also indirect benefits to acting now, from the process of tracking risks and making the necessary adjustments to product development, fund strategy, investor outreach, valuation, tax, and accounting. We think that first movers may well reshape the contours of global finance by setting the terms that others will follow.
Adam Gilbert, Global Head of FS Regulation at PwC, discusses the importance and urgency around companies preparing now for the transition away from LIBOR.
Karyn Daud and Nassim Daneshzadeh discuss why LIBOR is being replaced.
Asset and Wealth Management Leader, PwC US
Financial Services Advisory Regulatory Leader, PwC US
Asset & Wealth Management, Partner, PwC US
Partner, Financial Markets, PwC US
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Partner, PwC US