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PROGRESSIVE SCENARIO PLANNING FOR THE LIBOR TRANSITION

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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GALA TECHNOLOGY SELECTS NUAPAY TO ENABLE OPEN BANKING PAYMENTS

Nuapay, powered by Sentenial, today announces it has been chosen by Gala Technology, a payment security solution specialist, to provide Open Banking payments to its partner network and direct merchants across multiple sectors including retail, hospitality, and financial services.

Gala Technology’s multi-award winning SOTpay ‘Pay-by-link’ solution simplifies PCI DSS requirements and protects merchants against the ever-growing risk of fraud by ensuring that the transactions are authenticated, shifting liability and often lowering acquiring processing costs. SOTpay’s integration with Nuapay’s Open Banking platform now enables them to process non-card payments.

Nuapay’s FCA-licenced Open Banking payments service enables Gala Technology’s partners and merchants to accept payments via any sales channel of choice, including telephone, web chat, SMS and social media. It can do this without requesting sensitive card data, which ensures SCA compliance and eliminates fraudulent chargebacks.

“The capabilities of Open Banking have become more apparent in 2020 as merchants have been forced to explore alternative contactless, mobile and ecom-friendly payment methods that can be accessed quickly and are lower in processing costs, due to a need to respond to change brought by Covid-19.” shares Nick Raper, Head of UK at Nuapay. “We’re thrilled to be working with Gala Technology, as we  have a shared drive to eradicate payment fraud. This partnership will help to increase widespread adoption of live bank transfer payments as SOTPay gives us an exceptional opportunity to demonstrate Open Banking payments’ usability and benefits to new audiences.”

Nuapay is one of the only PISPs which offers a fully inclusive open banking payment initiation, webhook notification and payment account solution; which quickens checkouts, speed-up access to cash flow, reduces processing costs, and enables full reconciliation and batch settlements of transactions. Gala Technology’s customers now have access to new payment innovation and will be able to perform refunds or make instant payouts.

 

Steven Jones, Commercial Director at Gala Technology, said: “We chose to work with Nuapay as their complete Account-2-Account payments capabilities and high customer service levels are unparalleled. Looking forward, Nuapay’s presence within the UK and Europe will greatly help us reach new clients and will extend our service offerings to existing clients too. Nuapay’s Open Banking payments solutions help us to provide a better service; in turn, the time, money and resources our customers save will enable them to focus on growing their businesses in a more profitable way.”

Nuapay’s PISP processor has a single connection to all major banks in the UK and a growing number of connections across Europe, ensuring that Gala Technology’s clients’ payments will be supported, no matter where their customers bank.

 

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THE EMBEDDED BENEFITS IN ESEF DIGITAL FINANCIAL REPORTING

The inclusion of a simple link delivers serious gains in transparency, trust and real time verifiability for the whole financial ecosystem. It’s another digital feather in the LEI’s hat, explains Stephan Wolf, CEO, Global LEI Foundation.

 

In a battle for significance, no other public facing business document can match the annual financial report. It is the document that a public corporation must, by law, publish to describe its operations and financial condition, and to chronicle its activities over the past twelve months. Shareholders, investors and the wider financial ecosystem make innumerable strategic and operational decisions based on its contents.

In today’s digital age, then, it is little surprise that the European Securities and Markets Authority (ESMA) has mandated that annual financial reports published from the start of 2020 follow a consistent digital configuration, known as the European Single Electronic Format (ESEF) and, in them, embed their Legal Entity Identifier (LEI).

Stephan Wolf

On first glance, the ESEF format appears to be designed to drive financial report production into a convenient paperless form factor. While this is both true and highly commendable, an ocean of additional potential is revealed by ESMA’s insistence that corporations embed their LEI. This mandate will heighten transparency, enhance trust, and provide instant and non-repudiable verification that the organisation filing the report is, indeed, who they claim to be. These far-reaching benefits are all enabled by the report linking to the filing entity’s verified LEI reference data held within the Global LEI Index.

The simple process of embedding an organization’s LEI  – or, indeed, that of its affiliates, subsidiaries and parent companies – within an ESEF financial report means that regulators, investors, traders and other financial stakeholders, can consolidate and verify information on the filing entity faster and more conveniently than ever before.

LEI reference data includes business card information on an entity, including name and registered address, together with relationship data which confirms if the entity owns, or is owned by, other entities. This increased transparency relative to an entity’s ownership structure means that relationship networks between LEIs can be quickly and automatically established, since the LEIs of the filing entity, its affiliates, subsidiaries and parent companies are all provided in the new machine-readable ESEF format. Usefully, because the reference data is reverified annually by GLEIF accredited LEI issuers, it is always accurate and up-to-date. The net result is a substantially more useful document for end users, which is also verifiably trustworthy, authentic and integral.

ESMA has published the Global LEI Foundation’s 2019 annual report on its website to provide a best practice example of a report published in the ESEF format, which other preparers can reference. The report is published in human and machine-readable Inline XBRL and HTML formats, with LEIs embedded within both the annual report and the digital certificates of the report’s signing executive officers. The combination of these two features provides something completely unprecedented: instantly available, digitally verifiable credentials that confirm both the authenticity of document and the key individuals responsible for its content.1

Beyond the single report, the LEI embedding process creates broader opportunities for the financial ecosystem. Aggregating information on companies from multiple sources is dramatically simplified, making the job of comparing standardized financial information both faster and easier. This can be accomplished either manually, by ‘clicking through’ to view the LEI reference data, or via an automated process, saving yet more time and eliminating the risk of human error. In time, this level of facility will lead to the automated creation of online databases that use the linked LEIs to collate key data assets, to the benefit of, frankly, any person or organization that has interest, globally.

The mandatory embedding of LEIs in financial reports is just one demonstration of this technology’s transformative potential. In broader terms, not only is the LEI shoring up the digital financial ecosystem, it is helping to stabilize the evolution of the world’s digital economy. It is no exaggeration to say that the LEI, together with the Global LEI System, solves the problem of trust for legal entities worldwide. It is the only open, commercially neutral, standardized and regulatory endorsed system capable of establishing digitized trust between all legal entitles, everywhere. It was conceived and designed as a public good, and can be deployed without charge in a wide – and growing – variety of digital use-cases. Put simply, the more it is utilized, the more good it will do.

 

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