Engagement Summary
The Interbank Offered Rates (IBOR) underpin the vast majority of derivative and cash loan product contracts in the financial markets. As a result, the IBOR transition is likely to be one of the biggest transformation programs many global financial institutions undertake. Given the current focus on the COVID-19 pandemic, this transformation is even more challenging prompting the need for strong program leadership. The wholesale banking technology organization of a top 10 global commercial bank engaged Monticello Consulting Group in late 2019 to spearhead and manage the IBOR Transition Program. The massive transformation to be prepared for IBOR cessation can be broken into two distinct areas: 1) Portfolio Transition Readiness and 2) Go-to-Market Readiness. Portfolio Readiness is achieved by understanding all existing IBOR exposures and having vetted processes in place to shepherd every exposed facility to an approved risk-free rate (RFR), such as the Secured Overnight Financing Rate (SOFR) in the U.S. and the Sterling Overnight Index Average (SONIA) in the U.K.. Go-to-Market Readiness is achieved by the enhancement and testing of all pricing, underwriting, fulfillment, accounting, and data repositories that will need to onboard and service new facilities referencing the RFRs. Accounting system enhancements have been deemed the most critical and complex to support new RFRs and billing conventions.
Monticello was brought in to advise on key areas related to both Portfolio Transition and Go-to-Market Readiness:
Wholesale Credit Portfolio Transition Tools and Process:
In preparation for the IBOR cessation, Monticello was asked to review the current business-as-usual processes (credit, operations, technology, and fulfillment) that were in place and determine the scalability and stability. In addition, Monticello also evaluated the ability of existing processes to handle large volumes of transactions in an abbreviated timeframe. During the review, gaps were identified and Monticello designed an end-to-end process to guide the client engagement and facility transition activity of the internal partners. In support of the end-to-end process redesign, Monticello identified the need for, and managed the development of, new internal tools that would enable the bank to systemically intervene in the repricing process thereby reducing the time required for migration. This enhanced process ensured that the bank: (1) engaged and communicated with all clients (2) maintained all legal requirements of each agreement and (3) the ability to demonstrate each step taken to management, clients, and regulators.
Wholesale Credit Loan and Lease Accounting Enhancements:
Monticello was tasked with managing and delivering the end-to-end implementation of enhancements to all loan and lease accounting system of records. This included the ability to support the new risk-free rates (SOFR, SONIA, ESTR, SARON, TONAR), a ‘spread adjustment’ rate to those existing IBOR-referenced loans, and implementation of the new fallback language. In addition, Monticello partnered with the client’s subject-matter experts to construct an integrated project plan to transition all existing loans (legacy loans) and prepare new loans (“Go-to-Market Readiness”) before the industry-wide deadline of December 31st, 2021. Monticello advised the clients on new industry-wide requirements as consultative papers, rules, and regulations continue to emerge. As the IBOR transition impacts many different people, processes, and technology, Monticello reinforced strong governance and control practices. This included a detailed RACI (responsible, accountable, consulted, informed) matrix and an Integrated Communication Plan across the various teams. Additionally, Monticello ensured all sign offs were requested and received before completing all milestones ensuring completeness throughout each stage of the program.
Case Study Detail
PROJECT BACKGROUND
Global regulatory standards published in 2018 require all financial institutions to discontinue issuing IBOR-based loans and derivative contracts by December 31st, 2021. To stay competitive in the wholesale lending market and maintain market share, our client is making significant technology and operational investments to be prepared to support RFRs across multiple currencies. Banks and sell-side firms will lead issuance of RFR-linked products, providing critical liquidity to the market which will enable an industry-wide migration from IBOR-linked derivatives and cash loan products. This program was initiated as a result of a combination of pending regulatory requirements and business efforts to remain competitive.
ENGAGEMENT OBJECTIVES
LIBOR Transition Monitoring Tool Design:
Redesigned the end-to-end rate change, credit documentation, and approval processes to ensure stability and scalability. Additionally, repricing tasks were automated to allow for the most efficient transition possible. Developed new technology tools for use by stakeholders to transition facilities and provide the necessary data for monitoring. Designed interface and user actions within the technology tools to minimize the time frame needed during the transition. Designed and implemented new credit processes to allow for large scale approvals and documentations. Conducted multiple user group reviews to enhance the tool and identify existing process gaps. Created solutions to address the internal gaps utilizing existing tools as well as identifying new processes to close gaps. Tested end-to-end processes and solutions to ensure completeness and accuracy.
Loan and Lease Accounting System Program Management:
Developed an integrated project plan, covering all loan and lease accounting system of records, to successfully track and report the progress to ensure both Portfolio and Go-to-Market Readiness. Developed both industry and enterprise-wide IBOR requirements to ensure alignment with up-to-date regulatory announcements. Constructed an integrated communication plan, which includes a roles and responsibilities and RACI matrix. Coordinated and managed multiple different releases, engaging application owners and downstream testing partners to ensure operational readiness. Collated market data sources to advise client on industry recommended sourcing methodologies to support RFRs. Obtained stakeholder sign offs to allow software releases and new operational processes enablement.
BUSINESS VALUE
Monticello Consulting Group, through a continuous partnership with wholesale banking technology, operations, product management, and enterprise-wide credit teams, positioned our client to offer new RFRs in wholesale lending agreements and transition existing agreements to new RFRs. Our rigorous program management and testing governance methodologies, end-to-end process understanding, aptitude for risk-sharing, and timely execution supported the tangible business outcomes for our client to ensure readiness for this monumental shift in interest rate benchmark reform.
