How can you as a client prepare for transition?
An overview of the general areas needed to be acted on/considered in the Benchmark reform (not exhaustive)
- Investigate contracts/instruments referencing relevant benchmarks such as LIBORs, including but not limited to derivatives, supplier contracts, insurance policies, inter-company loans & deposits, pension policies, commercial contracts, supply chain financing.
- Confirm what will happen to your contracts if the relevant benchmark is no longer available.
- ARRs are intended to be close to risk-free-rates compared to LIBORs which carries an implied credit premium, it is important to understand the need to rebuild valuation and risk models.
- Understand calculation conventions and potential basis risk that could occur in the transition (difference in timing or between products)
- Adjust valuation of financial instruments according to IFRS 13 (IBORs are a key factor in the calculation)
- In addition, consider derecognition of hedge accounting according to IAS 39/IFRS 9.
- Investigate and assess impact on your systems and infrastructure, Develop/upgrade internal systems, processes and controls using IBOR for interest calculation to support new reference rates and announcement times.
- Recognize and prepare for upcoming changes to existing agreements with references to LIBOR.
- New contracts should reference alternative reference rates (ARRs).
- Decide on whether to adhere to the ISDA protocol or not. Consider seeking support/legal counsel if you are not sure of impact.
- Account for tax implications and transfer pricing.
- Manage potential mismatch in existing funding and hedging strategies.
- Provide investors with information (e.g., in the annual report) to demonstrate a proactive management of the IBOR transition.
- Update financial policies to reflect new reference rates.
Disclaimer
This page has been compiled by SEB Large Corporates & Financial Institutions, a division within Skandinaviska Enskilda Banken AB (publ) (“SEB”) to provide background information only.
Opinions, projections and estimates contained in this report represent the author’s present opinion and are subject to change without notice. Although information contained in this report has been compiled in good faith from sources believed to be reliable, no representation or warranty, expressed or implied, is made with respect to its correctness, completeness or accuracy of the contents, and the information is not to be relied upon as authoritative. To the extent permitted by law, SEB accepts no liability whatsoever for any direct or consequential loss arising from use of this page or its contents. The analysis and valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties; different assumptions could result in materially different results. The inclusion of any such valuations, projections and forecasts should not be regarded as a representation or warranty by or on behalf of the SEB Group or any person or entity within the SEB Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realised.