Transition away from LIBOR continues to spark confusion among firms, Accenture study finds

Maria Nikolova

The study finds that most respondents have transition plans in place but less than half of them believe they would be able to meet the 2021 deadline in order to complete this transition.

A new report from Accenture reveals that although many financial services firms have prepared their plans to shift away from the London Interbank Offered Rate (LIBOR), many remain uncertain as to whether they would be able to finalize the transition on time.

Accenture’s 2019 LIBOR Survey covered 177 firms from across financial services and corporate industries about their LIBOR preparedness. While 84% of the respondents have plans to transition away from LIBOR — which regulators are set to phase out at the end of 2021 — less than half (47%) are confident they would be able to complete the transition by then.

Only 18% of survey respondents say their LIBOR transition plan is “mature”, whereas two in five respondents say regulatory uncertainty and lack of clarity hamper execution of their remediation efforts.

LIBOR currently underpins approximately $400 trillion in financial contracts for derivatives, bonds, mortgages, commercial and retail loans, representing an enormous challenge, the authors of the study note.

UK regulators have been carefully examining the situation around LIBOR and the switch to alternative rates. In June 2018, the Financial Policy Committee (FPC) of the Bank of England underlined the financial stability risks around Libor and warned that market participants continue to accumulate Libor-linked sterling derivatives for periods well after 2021.

In July 2018, Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA) stressed the need for market participants to be prepared for transitioning away from LIBOR. He made it clear that firms that the FCA supervises will need to be able to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR. In particular, some firms will also have obligations to disclose and consider risks to investors when they sell LIBOR-related instruments, he explained back then.

In January 2019, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA noted that, despite the progress made in transitioning away from LIBOR, uncertainty remains on how this transition will happen exactly.

The Accenture study found evidence of confusion among financial providers regarding aspects of the transition away from Libor like timing. For instance, 40% of the respondents reported significant regulatory uncertainty and lack of clarity. Some firms do not think the 2021 deadline represents the end point for the LIBOR transition, with more than 40% of respondents expecting transition and remediation costs to continue into 2022, and over 30% expecting these to continue into 2023.

Further, the bulk of respondents do not yet have transition funding in place or are underfunded. When they do have funding, respondents seem uncertain as to where they can make the largest impact.

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