Mobilizing Amid Uncertainty
Regulators around the globe continue to drive the transition away from Interbank Offered Rate (IBOR) benchmarks, with several key deadlines quickly approaching. A recently published article by Reuters under the headline “The end of LIBOR: the biggest banking challenge you’ve never heard”[i] highlights both the challenges and complexities of the transition away from IBOR benchmarks and the general lack of industry awareness. Given the importance of IBOR as reference rates for vast amounts of loan and traded product exposures, financial institutions should quickly mobilize their resources to tackle the significant upcoming challenges.
Replacing IBOR with alternative risk-free rates (RFR) is a complex, multi-year, global initiative. At this stage, many uncertainties remain due to the sheer volume and wide range of exposures that are tied to IBOR benchmark rates and the varied approaches pursued by the different jurisdictions and currencies that are impacted by this transition. The fundamental differences between IBOR and RFR benchmarks will impact risk management, accounting, and operational processes and systems. Important initial transition phases are taking place as early as the middle of 2020 and it is vital that financial institutions and clients understand the ramifications and impact of the pending IBOR transition.
Setting up an IBOR Transition Program
In recent years, large banks have gained significant experience executing large regulatory-driven initiatives such as the Comprehensive Capital Analysis and Review (CCAR), Recovery and Resolution Planning (RRP), and Qualified Financial Contract (QFC) rules implementation. While many of these initiatives are highly complex and rely on contributions from a wide range of stakeholders, they are typically guided by a final regulatory rule, defined legal entity and geographic scope, and fixed implementation deadlines. By contrast, IBOR transition is a multi-phased process that needs to be implemented across a wide range of currencies and is subject to a multitude of different transition regimes and associate timelines. To tackle the uncertain scope and timing inherent in the IBOR transition process, it is critical that banks stand up a comprehensive program that is sufficiently flexible and empowers key decision makers.
Programs of this size inevitably impact a wide array of people, processes, and technologies, thus creating the need for top-down governance provided by an Executive Committee, as illustrated in Chart 1.
Chart 1
During the initial phases of the program, the IBOR Transition Leadership Group should create a RACI (i.e. Responsible, Accountable, Consulted, Informed) matrix to establish the fundamental roles and responsibilities of the various stakeholders. It is important to maintain and update the RACI matrix on a regular basis (i.e. monthly) as the roles of stakeholders may evolve as the program progresses. The RACI matrix should address both program and project-level communication plans and drive responsibility and accountability to ensure deadlines are met and appropriate controls are put in place. The IBOR Transition Leadership Group is also responsible for formulating key program objectives and tasks the Enterprise Project Management Office (Enterprise PMO) with tracking of milestones and tollgates to ensure that the key program deliverables are completed on time and within budget parameters.
The Enterprise PMO is responsible for collating and tracking all milestones and requirements across the cross-functional groups and provide an aggregated view of overall progress. Project managers aligned to the Cross Regional / Geographical Transition Groups should report to the Enterprise PMO on a frequent basis (at least weekly) to ensure that Executive and Cross-Functional Steering Committees receive accurate and timely information. Enterprise PMO should establish template-based standards with weekly and monthly updates that are shared, mandated, and governed by the Executive Committee to ensure consistency at the enterprise-level. It is essential that the information shared with the various stakeholders is at the appropriate level of detail. For instance, it is often counterproductive to share technical minutiae with senior stakeholders as this often leads to lengthy discussions of minor issues at the expense of more pressing topics. The central PMO function should provide clear guidance to project-level project managers to ensure that milestones, tasks and RAID items are defined and tracked in a consistent fashion. Finally, Enterprise PMO leaders should establish a ‘golden source’ for all program management information. This is essential to avoid duplication of tasks or maintaining conflicting information across the program. Use of spreadsheets and other decentralized program management tools should be discouraged, as they often result in inconsistent status information that needs to be manually reconciled.
Executive Committee meetings should occur at least once per month and Cross-Functional Steering Committee meetings should be scheduled at least twice a month. More frequent meetings should be considered if day-to-day stakeholders need additional guidance and support, or if the program risks are rising beyond acceptable thresholds. Regular attendance of committee meetings by senior stakeholders is critical to make sure there is a common understanding of status across the various stakeholder and that potential roadblocks can be promptly identified, escalated, and resolved. It is often helpful to maintain a standard one-page dashboard to quickly communicate critical program information. The dashboard should capture resourcing, budgeting, milestones, achievements, and RAID (Risks, Assumptions, Issues, Dependencies) items in a succinct fashion. RAG (Red, Amber, Green) status provides a simple and intuitive method to inform all relevant stakeholders of overall program status and high-priority items.
Creating Business Value
Establishing a strong governance and communication framework upfront is essential to the successful delivery of an IBOR transition program as even the most diligently managed initiatives will encounter unexpected challenges. There are simply too many moving parts and unknown factors that will only emerge once a program commences with the transition work. All stakeholders should pay particular attention to core dependencies that are managed outside of the purview of the IBOR governance structure. In our experience, many programs incur significant delays because dependencies lack clear accountability, common definitions, and realistic timelines. Strong program governance provides the core foundation needed to tackle the many challenges on the path towards an IBOR-free future. As a result, we advise banks to invest the upfront time and resources to establish a robust program framework so that the various stakeholders can successfully execute their IBOR transition plans.
Why Monticello?
Monticello consultants have extensive experience in the implementation of large-scale regulatory initiatives. Our firm understands the importance of diligent analysis, program management, and collaboration across teams within major financial institutions and across the industry. Our current work on IBOR Transition, Uncleared Margin Rules (UMR), Qualified Financial Contract (QFC) Record Keeping and US Stay regulations demonstrates the important regulatory expertise our consultants bring to our clients. Our teams possess deep knowledge of capital markets instruments, legal agreements and operational processes, as well as the related data and information systems impacts that will be in focus for the migration to RFRs. Monticello teams are dynamic, flexible, and highly motivated to assist you in your transition to a post-IBOR future.
[i] Analysis – The end of LIBOR: the biggest banking challenge you’ve never heard of – Reuters, Oct 8th, 2019 – Sinead Cruise and Lawrence White
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