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PROGRESSIVE SCENARIO PLANNING FOR THE LIBOR TRANSITION

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James Gannaway, Head of Financial Services, Board International

 

The Financial Stability Board have announced that disruption to markets caused by the COVID-19 pandemic must not stop banks from ending their use of the LIBOR interest rate benchmark by the end of 2021. Regulators worldwide have been engaging with the financial services industry to transition markets from LIBOR based interest calculations to Risk Free Rates (RFRs). This is being completed under a framework set out by the Financial Stability Board, representing the world’s largest central banks and regulators for G20 nations.

A key focus of reforms is to ensure widely used benchmarks are credible and robust. Regulators are clear that this means benchmarks should be based upon transactions. One of the most commonly known of these benchmarks is LIBOR, which is referenced by trillions of dollars’ worth of financial products, and used for calculating interest payments on bonds, loans, credit cards and mortgages.

As LIBOR underlying transactions have diminished, regulators have announced a target date to replace LIBOR and begun the process of identifying and creating alternative rates.  However, these rates are structurally different from LIBOR and it is unclear how existing products referencing it will change, and what new products will emerge.  There is a possibility of significant customer and economic impact and uncertainty over how this will develop.

The transition represents one of the biggest changes in the financial services industry ever, with an estimated $300tr of LIBOR global activity, covering derivatives, loans, bonds, trade, and working capital. Lenders and borrowers – will need to make changes in the months and years ahead. According to a paper from TCS, The End of the Road for LIBOR: Handling the Impact on the Financial World, readying for LIBOR transition will require banks to conduct a meticulous due diligence exercise to understand their current portfolio of LIBOR-linked products, exposures, services, operations and strategies. TCS say Banks would do well to start early and draw up a detailed strategy to transition to the new benchmark taking into consideration their individual agile and digital maturity.

Whilst uncertainty around the end of LIBOR continues to exist, the assumed base case scenario has to be LIBOR discontinuation for all currencies after 31 December 2021. This assumes a transition from LIBOR to alternative reference rates (ARRs) before the end of 2021. If there is still an inventory of LIBOR transactions at that point, there will be large operational and value transfer risks if LIBOR were to be discontinued. In this scenario, there may be a potential pressure for an extension, probably combined with a stop on any new LIBOR-based products. Any extension, however, has been rejected by several regulators and it would be risky to plan on this assumption.

So how is it possible to model for future and entirely unknown scenarios, what needs to happen, and what does progressive scenario planning for the LIBOR transition look like, as any deadline starts to creep closer? In a 2018 paper, LIBOR transition: Setting your firm up for success, Deloitte say Boards at Financial Services organisations should consider the following three steps for setting-up a LIBOR transition programme:

Firstly, mobilise a cross-business unit and geography transition programme, with C-level sponsorship. Deloitte say that in addition to accountable transition outcomes and activities, this must include accountability for decision making; for example, decisions on the timing of new product launches, or when to engage and transition certain customers.

Secondly, set out a transition roadmap. Deloitte’s paper highlights how LIBOR transition programmes should include various activities, but just as important a roadmap must identify key market and regulatory developments and milestones and track these. It may not be possible to take decisions or actions until specific developments occur, which will affect the pace of transition.

Thirdly, identify the risks and implement mitigants early. There are significant risks for LIBOR transition that leadership should be confident are being addressed. It’s vital to agree the mitigants to these risks and, subsequently, ensure that the effectiveness of mitigants is reported to leadership.

Given both the uncertainty and complexity involved, the LIBOR transition, will be one of, if not THE biggest transformation for the financial sector ever. It’s never happened before so there is no existing experience or roadmap for what different look like. Traditional Business Intelligence (BI) approaches and tools are essentially useless for trying to model what comes next for LIBOR, as they typically rely on data from what has happened in the past. Indeed, as far as LIBOR is concerned, relying on any existing BI tool, is the equivalent of looking in the rear-view mirror, as a huge truck hurtles fast towards your windscreen.

The good news is that instead of relying on traditional rear-view mirror approaches, technology now exists to better understand LIBOR data points and milestones, and analyse different potential futures to understand implications for LIBOR strategy, operations and value transfer, and take control of important LIBOR decision-making.

Milestones and mitigants can be scenario planned in unlimited LIBOR-transition plan versions and scenarios, including both operating and financial plans, making it easy to track the evolution of LIBOR transition plans over time and compare them with potential results.

It’s now possible to directly modify any LIBOR transition data model, during any planning or forecasting process throughout an entire integrated business planning flow, with the right decision-making platform. A newly created specialist business unit, such as the cross business, multi-geography LIBOR business unit outlined by Deloitte, or a game-changing decisions about existing LIBOR aligned products, or new ARR products, a new market or regulatory development, or modelling for different investments, can all be inserted in a controlled way during the LIBOR transition planning cycle, simulating the effect of any new transition scenario on the whole business model.

The path to transition away from LIBOR is complex, and there is no one size fits all approach based on pre-existing business intelligence tools. New alternative rates will be calculated on a different basis to LIBOR, everyone impacted is at different stages of transition, moving at different speeds towards, different outcomes. The consequences of reform are unpredictable and may have an adverse impact on financial instruments linked to any of these benchmarks. But the financial sector can embrace a new approach to scenario planning, capable of modelling various and new unknown scenarios looking forward, rather than pre-existing approaches based on rear-view mirror intelligence looking backwards.

The LIBOR transition, has the potential to highlight how some companies lack the processes and tools to make rapid decisions to address change, but it doesn’t have to be this way, and instead can usher in a new era of progressive scenario planning for financial service organisations who get it right.

 

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ENTRUST INTRODUCES ADAPTIVE ISSUANCE™ PRODUCTION ANALYTICS SOLUTION TO OPTIMIZE CARD ISSUANCE OPERATIONS

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The new solution provides intelligent, data-driven insights to card issuers with Central Issuance systems for improved and timely management decisions

 

Entrust, a global leader in trusted identity, payments and data protection, today introduced the Production Analytics Solution, designed to provide real-time data and actionable insights to optimize card issuance operations. The solution is part of the Entrust Adaptive Issuance software platform trusted by banks, governments and other organizations worldwide.

With the complexity of card issuance environments and lack of real-time visibility into production system operations, card issuers have difficulty effectively overcoming efficiency challenges across the production ecosystem. Entrust has leveraged more than 50 years of expertise in the card issuance market to develop a platform that will provide the intelligent data and expert support needed to master operational planning for the alignment of people, equipment and processes, positioning card issuers as leaders within the industry.

“Card issuers are in search of solutions that help bring efficient continuous process improvements and optimization to the production floor,” said Dan Good, Vice President, Payment and Identity Issuance Solutions at Entrust. “The Entrust Production Analytics Solution was developed by the same engineers that built the systems it supports. And, we’ve gone a step further to provide one-on-one consultation to our customers, allowing them access to our team of experts to help identify and remove bottlenecks, increase operational efficiency and reduce production costs.”

 

How it works

The Entrust Production Analytics Solution collects information directly from the Central Issuance systems on the production floor and converts it into a dynamic dashboard of data for in-depth analysis. It offers point-and-click drill down capabilities to refine the accumulated data over any time interval, and the data can be shown in a variety of ways to see the most appropriate insights for the operation.

Key features and benefits of the subscription includes:

  • Real-time, actionable data collection that supports SPC (Statistical Process Control) methodology to monitor production statistics and trends for immediate problem solving
  • Regular industry expert engagements that will provide in-depth analysis of data and actionable recommendations for card issuer efficiency improvements

Regular software updates and new features

 

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UK READY TO SPEED UP THE DIGITAL TRANSFORMATION REVOLUTION

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More than half of businesses set to accelerate projects due to pandemic

British business is set for a digital revolution according to a survey which indicates that 56 per cent of companies are speeding up plans because of the pandemic.

With so many employees working from home, and a battle to get back on track after a year of turbulence, businesses are realising their processes and systems are potentially outdated and in need of an overhaul.

The survey, commissioned by Crown Records Management, revealed:

  • 32 per cent are planning digital transformation in the next 12 months to cope with the new normal.
  • A further 24 per cent plan to act within five years.
  • 66 per cent say the pandemic has made the C-Suite in their business recognise the importance of digital transformation.
  • 30 per cent say allowing employees to work at home efficiently is now a key driver for digital transformation.
  • 27 per cent do not view their business as having already ‘gone digital’.
  • Only 26 per sent say they have already fully digitised all their back-office functions.

David Fathers, Regional General Manager at Crown Records Management, said: “There was already a big desire from UK businesses to develop a digital strategy even before the pandemic, driven by a demand for improved data security and a need to be more competitive in the market.

“But these survey results show that companies now want to increase the pace of change because of the events of the last year.

“Having so many employees working from home has shone a light on the inadequacies of systems currently in place in many companies, of all sizes. Employees have found that information has been difficult to track down and slow to access.

“There’s a myth that Western countries such as the UK are so far ahead in the digital field that most businesses have already undergone digital transformation.

“The survey showed that only a quarter of businesses have fully digitised all their back-office functions, which means there is a long way to go.”

The survey, undertaken by Censuswide, polled 401 decision makers at companies across the country with between 250 and 5000 employees.

David Fathers added: “We also asked whether people considered their business as having already ‘gone digital’ and surprisingly 27% said ‘no’.

“That figure was even higher in London at 30% and highest of all in companies of between 250-500 employees – at 46%.

“It is vital that businesses begin the digital journey soon. The benefits are compelling.

“Digital solutions can help a business become more efficient, save time and money, and make it simpler for employees to do their job – and that’s even before we begin to think about compliance and data security, which are huge business issues in the modern world.

“Perhaps it has taken the pandemic for some boardrooms to wake up to the importance of digital transformation, but if the intentions set out in this survey become reality, it can only be a good thing for UK business.”

 

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