Libor transition is perhaps the biggest regulatory change programme for larger firms, because it entails changes to derivatives and loan businesses. Two sizeable challenges remain. One is transitioning legacy derivatives contracts and loans onto Sonia, the new risk-free rate, or a fall-back rate. The second, equally difficult task, is embedding Sonia into banks' lending and risk management IT and developing lending products.
"Undoubtedly COVID-19 has slowed things down and the regulators' response is a reaction to that. At the same time, a lot of the project work from the bank side has been continuing. Libor work or pitches may have slowed down because of us being confined, but that is not the case anymore. All the banks have understood that it won't go away. They won't get an extra year. They therefore have to think about it now. That said, from a transactional perspective, there has been a slowdown in the readiness to embrace [measures], including new rates in transactions. They have said they are not ready from an operational and IT perspective to include the new rates," said Sharon Lewis, a partner at Hogan Lovells in London.
Citing COVID-19, the Working Group on Sterling Risk-Free Reference Rate's (RFRWG) Tough Legacy Taskforce, which is looking at transition arrangements for the difficult-to-transition cohort, has called for legislation to address these exposures.
"The case for action has been strengthened by the market impact of the COVID-19 pandemic. While the deadline for the market to be ready for the cessation of Libor by the end of 2021 remains the same, there is less time available in practice to meet it. To the extent that action can feasibly be taken, and accepting the challenges and dependencies required in delivering it, the taskforce proposes that the UK government considers legislation to address tough legacy exposures in contracts governed by English law that reference at least sterling Libor, and ideally other Libor currencies, that are still in operation when Libor is expected to cease on or after the end of 2021," the RFRWG wrote in its on the identification of tough legacy issues.
Legislation, however, is not needed for the bulk of Libor transition work. Firms will need to look for alternatives to PDFs, spreadsheets and email communications to ensure change is executed consistently and accurately.
"Sifting through that legacy documentation is an enormous task. Firms are doing ... a lot of work already with [optical character recognition] tools to digitise all kinds of content. but digitising is just one leg of the Libor repapering or any repapering exercise. What we are seeing firms ask now is how you then transform that legacy and prepare those amendments for renegotiation? That's where humans are back to editing multiple versions and trying to communicate to each other doing all these agreements of terms. That's a huge amount of work, and in that sense working from home doesn't help. Digitisation and having those working-from-home collaborative tools is key," Dokuchaeva said.