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SURVIVING AND THRIVING AS LIBOR WAVES GOODBYE

By Neil Murphy, Global VP, ABBYY

 

The transition from the widely used LIBOR interest rate will fundamentally alter financial markets around the globe. Currently, $350 trillion worth of financial contracts reference this rate worldwide. Banks and other financial institutions are now required to phase out any agreements that utilise LIBOR as a benchmark and transition to an alternative reference rate by the end of 2021. While this may seem like a long time from now, the process will likely be lengthy and complex. To ensure a smooth transition, banks and other impacted organizations will need to begin preparing well in advance. Right now, only 19% of firms say they’re ready.

The transition process will be no mean feat. It will involve creating task forces, sorting through immense volumes of documents, adopting new technologies, re-negotiating current agreements and developing entirely new financial products. Preparing early and thoroughly is critical for minimising risk from every angle – financial risk, legal and compliance exposure, and operational disruption. Planning ahead will also facilitate a smooth process for customers, helping maintain – or even increase – client satisfaction and retention.

While the transition may seem daunting for some organisations, it doesn’t have to be. To begin preparing, businesses need to understand what LIBOR is and how it will affect your business, including which products will be impacted, what the replacement options are, and what exactly the complex transition process will involve. Let’s start from the beginning.

 

What’s behind the transition?

According to the Consumer Financial Protection Bureau, the LIBOR rate is based on specific types of transactions between banks which now do not occur as frequently as they used to, making the rate less reliable. The governing bodies that oversee this index have stated that they cannot guarantee the rate will be available after 2021.

Certain private-sector banks which are currently required to submit information that is then utilized to set the LIBORrate will stop being required to do so after next year, which means the rate will subsequently not be an accurate reflection of its underlying market. At this point, the quality of the rate will likely degrade to a degree at which it is no longer credible, which could cause LIBOR to stop publication immediately.

The end of LIBOR is imminent, which makes preparing for the transition and implementing alternative reference rates in advance an imperative for financial institutions. All types of banks and financial institutions will be impacted, from small regional banks serving local consumers to large global financial institutions providing commercial services to multinational enterprises. In addition, related industries, such as insurance, will also be impacted by the discontinuation of LIBOR. Even industries that are completely outside of the financial sector will feel a ripple effect.

 

What’s the impact?

From 30-page mortgage agreements to 340-page commercial loan contracts, every type of financial product that utilizes LIBOR will be impacted. First up is derivatives, including interest rate swaps, cross-currency swaps, commodity swaps, credit default swaps, interest rate futures, and interest rate options. Bonds will also be impacted, including corporates, floating rate notes, covered bonds, agency notes, leases, and trade finance. As for loans, the impact will be far reaching, from syndicated to securitised, business loans, real estate mortgages, private loans and even certain types of student loans. In short, any type of loan that utilizes a variable interest rate based, in whole or in part, on LIBOR will be impacted.

There will also be an impact on short-term instruments such as repos, reverse repos, and commercial paper, and onsecuritised products like mortgage-backed securities (MBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS). Finally, in the retail sphere, it will affect loans, mortgages, pensions, credit cards, overdrafts and late payments.

To replace LIBOR, there will be various Alternative Reference Rates (ARR’s), which will vary by geography.

 

How should we prepare?

Many companies have thousands, even hundreds of thousands, of LIBOR-based financial agreements circulating within their organisations. There are some global investment banks whose volume of related contracts reaches into the millions.

There will be many necessary steps in a successful transition. One of the most important is assessing where LIBOR is used across all business operations and identifying each individual contract, agreement and related document. Without a doubt, finding, collecting, and compiling every contract that utilises the LIBOR rate will be an extensive and complex process.

Whether it’s a small- to mid-size bank or a large financial institution with hundreds of thousands of contracts, sifting through, reading, and pinpointing every document that references LIBOR will be cumbersome, costly and time-consuming if conducted entirely manually. The right technology, particularly those that are powered by AI and content intelligence technologies, could transform this process. They can sort through volumes of documents, accurately identifying relevant contracts thanks to advanced OCR and NLP technology, and automatically extracting relevant data. The right tools go a long way in simplifying the complex document-related processes involved in the LIBORtransition.

Identifying all related contracts is only the first step, however critical it is. After all relevant agreements have been compiled, the next step is to transition each individual contract to the new alternate reference rate. For many financial institutions, there will likely be a significant degree of re-negotiation involved in this process, particularly for contracts governing high-value financial products or agreements serving commercial clients.

The transition process is one that will likely involve many business units – from legal and compliance for managing risk, to product management for creating new offerings, to marketing and PR for developing effective communication strategies for customers, investors and stakeholders. Successfully navigating the transition will require a clearly defined roadmap, long-term vision, and the right technology. This combination will be crucial for firms to be prepared for the transition, and to ensure their business isn’t adversely affected by it.

While the deadline for transitioning from LIBOR may be over a year and a half away, time is still definitely of the essence. For businesses that want to minimise financial and legal risk, ensure a seamless transition, maintain their market share, and ensure customer loyalty, the time to begin preparing is now.

 

News

INTERNATIONAL BANKING NETWORK EXPANDS AS IT WELCOMES STANDARD CHARTERED BANK

IBOS Association (IBOS), an international banking network, is delighted to announce its newest member to the group, Standard Chartered Bank.

A unique international alliance of some of the largest banks in the world, IBOS members collaborate to serve each other’s’ international clients in markets where they themselves do not operate. Standard Chartered’s rich history and extensive network across Asia, Africa and the Middle East will complement IBOS’s strong geographic coverage in Europe and the Americas, thereby creating compelling global opportunities for clients of all member banks.

IBOS Managing Director, Manoj Mistry, commented: “I am delighted that Standard Chartered is joining IBOS, further strengthening our network across this key region and opening more doors in Asia for our clients. We are relishing this next chapter and we are thrilled to be working with Standard Chartered.”

Standard Chartered will initially add Hong Kong, Singapore, India, China, Taiwan and Malaysia to the IBOS network. In time, both parties will explore expanding the relationship to additional markets where Standard Chartered operates.

Speaking on behalf of Standard Chartered, Jiten Arora, Global Head, Commercial Banking, commented “Helping businesses to connect and grow internationally is central to our brand promise. We are pleased to be a part of IBOS, which will further strengthen our role as a strategic partner in our clients’ growth journeys. We also look forward to supporting internationalising mid-corporate clients of member banks, who are keen to venture into the markets across our footprint and using our deep local knowledge to help them enter, navigate and prosper by accessing some of the most vibrant economies, trade corridors and supply chain ecosystems globally.”

Despite the current pandemic, IBOS remains open for business and the network is utilising technology to succeed at achieving its goals and ensuring clients continue to have access to services as normal. IBOS also has its sights set on growth into the markets that the ever changing economic and geographical developments demand, as it continues to develop its expansion into Australasia.

Moreover, Manoj notes that: “Additional markets across CEE are also being contemplated to serve the network as other banking association groups are starting to wind down.”

Matt Tuck, Head of Commercial Product, Service & Operations at NatWest Group, said “As a long-standing member of IBOS since its inception in 1994, NatWest Group is delighted that with Standard Chartered’s membership IBOS is extending its reach into Asia for the first time. As a market leading UK Commercial Bank, NatWest Group is looking forward to working even more closely with IBOS to support our clients’ international banking needs across this region.”

“The addition of Standard Chartered presents an incredible growth opportunity for the IBOS network and for its members,” said Chris Ward, executive vice president and head of product management & operations, PNC Treasury Management and IBOS chair and board of directors’ member. “The continued global expansion of the network will help to provide our members’ customers with the service and resources they need to be successful.”

 

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ARE MIDDLE EAST ENTERPRISES PREPARED FOR THE FUTURE?

Deloitte releases 2020 tech trends report

 

Deloitte’s 11th annual report on technology trends captures the intersection of digital technologies, human experiences, and increasingly sophisticated analytics and artificial intelligence technologies in the modern enterprise. The report explores digital twins, the new role technology architects play in business outcomes, and affective computing-driven “human experience platforms” that are redefining the way humans and machines interact.

During the current COVID-19 crisis, organizations have been turning more and more to technology to enhance business resilience and continue to operate. As organizations are forced to utilize remote working where possible or take pause, many are also realizing the benefits of this way of working as an option post COVID-19, to improve efficiencies and become more agile.  While currently dominated by communication technologies, building resilience will also require us to closely examine, and build on, trends such as ethical technology and trust, human experience platforms and architecture, and the macro forces of digital experience, cloud and risk.

“The most successful businesses today are combining cutting-edge technologies like machine learning and IoT with disruptive IT architecture and supercharged talent to create entirely new ways of working – and they already see the benefits,” said Bhavesh Morar, Lead Partner for Enterprise Technology and Performance, Deloitte Middle East. “And with enterprises needing to adapt and respond quickly to ongoing technology disruption, Deloitte expects to see more IT and finance leaders working together to develop new flexible approaches for funding innovation.”

 

The Deloitte report’s five trends of focus for 2020 include:

  • Digital Twins – Bridging the physical and digital:Digital twin technology allows businesses to create increasingly sophisticated virtual models to optimize processes, products, and services, enterprises will integrate IoT, machine learning, advanced computing infrastructure, and more to unlock entirely new business models.
  • Architecture Awakens:Systems architecture will become a strategic priority as enterprises redefine the architect role to be more nimble, responsive, and collaborative. Architects will work across the business and work creatively with non-technical project teams – forming a competitive differentiator in the digital economy.
  • Ethical Technology and Trust:Enterprises in every geography are realizing that their embrace of technology is an opportunity to gain – or lose – trust, and with it, customers’ business and brand loyalty. CIOs will emphasize ethical tech in the coming years – and create processes to help solve ethical dilemmas related to disruptive technologies.
  • Human Experience Platforms:To address the lack of connection humans often experience with daily digital interactions, a growing number of enterprises are injecting emotional intelligence into their systems. These include AI capabilities such as machine learning and voice and facial recognition, which can better detect and appropriately respond to human emotions. The net result is emotionally intelligent human experiences that leverage connections between people, systems, data, and products.
  • Finance and the Future of IT: As enterprises become more agile, financial operations will need to support new modes of working. That means CIOs and CFOs will need to explore how a new, flexible approach to enterprise finance¾across budgeting, contracting, capital planning, and more¾can redefine the future of tech innovation.

“Enterprises in the Middle East are no longer satisfied with being regional leaders – now the ambition is to go global and lead globally. There is a growing interest in looking beyond what’s new to what’s next. At present, many enterprises are looking to strengthen their structures, capabilities, and processes required to harness technology macro forces and innovate effectively in the face of exponential change,” concluded Morar.

 

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