Concerns around the amount of work yet to be carried out with regards to the London Interbank Offered Rate (LIBOR) transition still remain, as indicated by Tal Reback, principal at KKR, during a hosted discussion with Matthew Hays, global head of asset finance and securitisation practice at Dechert.
The discussion took place shortly after the March 2021 ICE Benchmark Administration (IBA) announcements. Reback serves as a member of the Federal Reserve Board and the New York Fed’s Alternative Reference Rates Committee (ARRC) and the LSTA.
The Federal Reserve issued guidance to assist examiners in assessing supervised firms’ progress in preparing for the LIBOR transition last month. The interagency statement noted that entering into new contracts that reference LIBOR after 31 December 2021 would create “safety and soundness risks”.
Discussing concerns around the transition process and whether the market is going to be ready, Reback says: “I think there's a lot of work to do. You know, if we all do our part now going forward and are diligent about how we paper deals, we're thinking about how this change affects organisations, borrowers start to understand what it means for them should-be lenders, and we have those dialogues.”
Reback points out that the market could be in a position to ensure a smooth transition, but highlights that would be based on everyone doing their part.
With regards to the timeline for LIBOR, Reback says: “I think the timeline is pretty set at this point. I don't think we're going to see another extension. I do think this enables market participants across the board to really move forward with execution and planning.”
According to Reback, the BTE shifted the transition from being something more theoretical or conceptual in people's minds to being really defined. She also suggests that with the US dollar going out till 30 June 2023, there's clarity.
“I think you need to be prepared to live in a non-LIBOR world by year-end, which, in my mind, net-net is kind of the same place where we were pre-extension, in terms of being prepared, understanding your fallbacks, operationalising the change, thinking about asset liability management. There's just a ton of stuff to do. And I think the market knows that now. And now we can kind of really stomp forward,” she affirms.
Hays also asked for Reback’s thoughts on what the most significant factors will be going forward, such as data analysis for example.
Reback highlights the devil's in the details here with the operational downstream impact. She says: “Well, first, we can maybe spend a second on just data and systems, you know, we're moving to a rate that's compounded in arrears. Even if you use daily simple Secured Overnight Financing Rate (SOFR) it's a little different.”
“It's very different structurally than what LIBOR is today. And just think about accounting systems being dynamic books and records cash received versus cash owed. Any type of trading activity, I think, especially in the loan market, you know, the loan market's opaque, it's not like the floating rate note market or the bond market,” Reback adds.
Additionally, Reback highlights there's a reason it's T+7 at the minimum suggesting that's the complexity the industry is going to have to work through.
“And I think there's been a ton of planning from the LSTA, the Alternative Reference Rates Committee on that and putting all the tools in place and having really robust industry discussions,” Reback comments.
Later during the discussion, Hays says: “One thing that we've seen in the market having been used a few times is the concept of the in arrears rate or SOFR average in arrears used for periods in advance.”
He asks: “So effectively taking what is a term LIBOR rate and replacing it with an arrears? SOFR rate? Do you have any concerns about that methodology? Do you think it will continue to be used in the market? Or should the market largely transition to using an actual in arrears rate with an in arrears accrual methodology?”
In response, Reback notes she did not have particular concerns per se over it but indicates there are certain pockets of the market using that methodology over others.
On the corporate side, she explains: “I've really seen kind of daily simple and compounded in arrears used the most but yes, I do think the mortgage market, and certain securitisations have been leveraging the in-advance methodology. I don't know if I would say, concerned but anytime you have variability between methods, that's something to be mindful of.”
