LIBOR, reference rate reform

Understanding the transition away from LIBOR

The financial services industry is racing against the clock in one of its most significant changes in decades. The London Interbank Offered Rate (LIBOR) will be phased out at the end of 2021. LIBOR is the benchmark for $350 trillion in bonds, loans, derivatives, and securitizations worldwide. It will be replaced by a variety of alternative reference rates (ARRs) around the globe – generally by country.

Changing from LIBOR to ARRs require financial firms to update front- and back-office systems, retrain staff, and redesign processes. They will need to modify or renegotiate potentially thousands of contracts. There’s a lot of work to do, with long lead times, so the potential costs of delay grow with each passing week.

How can you manage the uncertainty? PwC can help.

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LIBOR Strategy and Analytics

The LIBOR Strategy and Analytics portal is an end-to-end tech-enabled service built to extract key contract clauses, analyze LIBOR terms and provisions, deliver best-in-class remediation recommendations, and position clients to capitalize

The LIBOR transition journey

1. Getting started

If you’re just at the early stages of preparing for life after LIBOR , you may find the scope and complexity of the project to be pretty daunting. Certainly, the stakes are high, and you may need help from internal and external partners who don’t understand the urgency.

LIBOR affects virtually all aspects of the organization. There is a lot of uncertainty about existing contracts, what regulators want, how the industry will evolve, and more. This is a dynamic problem — and it can be both highly technical and operationally complex.

PwC can help you see how this could affect your strategy and operations, the potential economic impacts — and what you can do about it.

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2. Moving your transition plan forward

If your program is underway, you’ve likely already seen some of the subtleties. Before you think about remediating contracts, you have to find them all – and make sure your terms are consistent. To monitor risk, you may want to have a LIBOR view and a SOFR view – and you may need to update policies and systems. Your operational systems, from interest rate calculations to security master data, may need changes – and with the whole industry starting to pay attention to the transition, trained resources are getting harder to find.

We understand the potential pitfalls because we’ve been doing the work. Whatever your industry, we can help you find solutions to your toughest LIBOR transition issues, from tax to third party risk management.

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3. Using the transition for competitive advantage

Market leaders understand that the LIBOR transition actually gives them a terrific opportunity. With your knowledge of the subtleties of SOFR and other ARRs, you may be able to create new, truly differentiated products. By digitizing your contracts, you may improve customer experience and increase loyalty. The updates you make to systems and processes can make you more agile and more efficient. And managing the transition across multiple ARRs may increase your global competitive position.

Some people view the LIBOR transition as an infrastructure problem. We can help you see it as part of a digital transformation program that can lead to sustained growth.

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Financial services impact by sector

Banking and capital markets

For banking and capital markets firms, LIBOR references can be found in financial instruments wherever you look: lending, investing, derivatives and deposits. ARRs behave differently from LIBOR in some significant ways. These differences are magnified because of the leverage that is a normal part of banking and capital markets balance sheets. So, these firms may need to put in much more effort to identify and update affected contracts, systems and processes than most other firms in the market. Banks and capital markets firms may also face much more scrutiny from regulators about how ready they are for this transition. They’ll likely face greater expectations from their customers and counterparts in managing through the process, too. We’ve been helping banking and capital markets firms prepare for the LIBOR transition for years: it is a fundamental business change.

Insurance

Insurance companies could face significant challenges from the LIBOR transition. The effects will likely spread across their businesses, from hedging the differences between assets and liabilities, to pricing products, gauging investment portfolio risk and assessing the impact of the change to its asset/liability matching. The coming transition is fundamentally about risk management — which is the defining purpose of the insurance industry. By making it a strategic priority and continuing to recalibrate efforts as necessary, insurance companies can turn the risks of moving away from LIBOR into opportunities for growth. Read more about the LIBOR transition challenges and opportunities facing insurers.

Asset and wealth management

Asset and wealth management firms may manage a variety of asset classes, in different geographies, through multiple strategies. Most rely heavily on third parties, such as custodians, brokers, and pricing vendors. They also serve a wide variety of investor types with different interests. So, the LIBOR transition could pose challenges for these firms across the full range of their business—from investment strategy and asset origination, legal, operations, asset liability and risk management, and financial reporting to client communication and business development. The changes may not always be obvious. For example, many managers use credit facilities to add leverage and increase returns. If these facilities are linked to LIBOR, they’ll need to be changed — and the timing and nature of these amendments may affect limited partnership cash flow returns.

Private Equity

Private equity (PE) firms could have a lot at stake with the LIBOR transition, as they will likely confront challenges that stem directly from their structure and purpose. Most PE portfolio companies are structured with debt financing. Any instability in credit from the LIBOR phase-out could especially jar their portfolio companies. Amending and issuing new credit facilities with new interest rate terms may be more challenging during the current economic environment. Like asset and wealth managers, many PE managers use credit facilities to add leverage and boost returns. If these agreements are linked to LIBOR, they’ll have to be changed, and this may affect cash flow returns for limited partnerships (LPs). PE firms will want to think through how they help their portfolio companies through this transition — and how their decisions about the transition could affect LP returns. Read more about the LIBOR transition challenges and opportunities facing private equity firms.

Explore our solutions

Mobilizing your team

PwC can help you create a LIBOR transition program that works for where you are now. We can develop and implement a tailored governance structure that can help you manage your program across your business units and the geographies where you operate.

Analyze your exposure

PwC can help you analyze your company’s direct and indirect exposure to the LIBOR transition. We conduct assessments across your operations to help you understand where remediation might be needed with your products, functions, and systems.

Define the strategy

PwC can help you evaluate how your products may need to change once markets are no longer tethered to LIBOR. We assist you in evaluating how economic implications for your new offerings, and the downstream effects of any changes you might make.

Update your contracts

PwC can help you address vulnerable contracts, including fallback provisions, on your terms. We can work with you to identify LIBOR-linked contracts and extract the relevant data, analyze those contracts for risks, and create a remediation plan to support your negotiations with customers and counterparties.

Educate your stakeholders

PwC can help you create an outreach plan for clients, counterparties, vendors, and regulators. We’re prepared to support you as you share how your company is adapting to the changes and monitor if the message is getting through.

Prepare your systems

PwC can help you identify and manage the updates you’ll need to process ARR trades across internal and external systems. We can help you update front- and back-office systems, treasury and ALM systems, vendor solutions, and supporting business processes.

Adjust your models

PwC can help you change your risk and valuation models to reflect the effects of the new ARR(s). We can work with you to construct curves, address changes to Central Clearing Counterparty (CCP) discounting, incorporate historical data sets, adjust risk capital calculations, and validate the updated models.

Adapt your accounting and tax programs

PwC can help you understand how the change will affect your accounting and tax programs across the relevant standards. We can help you adapt to the post-LIBOR environment, reflecting hedge accounting rules and managing tax impacts on funds transfer pricing.

LIBOR and corporate finance

LIBOR affects corporations too

Corporate CFOs are beginning to focus on potential risks of the coming LIBOR transition. They know managing corporate debt and liquidity could get more challenging as LIBOR-based products become less desirable. And, they may need to adjust their use of foreign exchange or commodity hedges to manage risk. Without a clear accounting, though, few corporations can accurately identify all of their explicit exposure.

Learn more on LIBOR transition for corporations

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John Garvey

Global Financial Services Leader, PwC US

John Oliver

Partner, PwC US

Chris Kontaridis

US Deals, Strategy & Operations Leader for Tax Reporting & Strategy, PwC US

Justin Keane

Financial Services, Principal, PwC US

Jeremy Phillips

Asset & Wealth Management, Partner, PwC US

Jessica Pufahl

Financial Services, Partner, PwC US

Maria Blanco

Principal, PwC US

Gaurav Shukla

Capital Markets Strategy Partner, PwC US

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