Apart from G-SIBs operation in the region, APAC firms are not prepared for the transition away from IBORs, according to a new report from Sia Partners.
The report presents the findings of an APAC IBOR Transition Benchmarking Study, conducted by Sia Partners from March to May 2020 to assess the state of readiness for transition from LIBOR (and other IBORs) to ARRs (alternative reference rates), as well as the challenges and nuances market participants face in the transition.
The study found that despite the Covid-19 related disruptions during the first half of this year, global firms with IBOR transition plan in place have continued to meet their key programme milestones, with only 30% of survey respondents experiencing pandemic-related delays.
However, many APAC headquartered institutions are not prepared for the transition. In particular, some regional banks and buy-side firms have not yet started transition planning, with some citing a lack of clarity from APAC regulators as a reason for delays.
The report summarises the key transition developments in ten APAC markets, and offers insights into how different firms in the region are preparing for the transition and tackling the challenges they face in the transition, in five key areas:
Transition organisation and governance: The study finds that IBOR transition governance is largely established at all G-SIBs and D-SIBs who participated in the survey, in some cases with dedicated APAC teams. However, transition governance is less established on the buy-side, with many firms saying they had no formal programme in place, and no central coordination or formal effort to prepare for benchmark reform in some cases.
Firms said their IBOR programmes were initially impacted by the Covid-19 pandemic, as onboarding and hiring stalled, disrupting their ability to ramp up resources to support transition efforts. Client communication and external outreach were also impacted. However, many firms saw limited medium- to long-term impact from Covid-19 and were still mostly on track in their internal assessments – particularly those firms that started global programmes twelve months or more ago and had resources and budgets already allocated. Smaller firms which only started their APAC analysis this year are at greater risk of delay if Covid-19 disruptions persist.
Regulatory initiatives and litigation: Some 91% of respondents in the study indicated they have regular interactions with regulators, though these interactions have largely been with the HKMA (Hong Kong Monetary Authority) and MAS (Monetary Authority of Singapore). In Hong Kong and Singapore, firms have started submitting surveys to regulators reporting on their transition progress, and some have engaged with industry associations on regulatory developments across APAC.
Two main areas were cited as needing more clarity from APAC regulators. First, there is a need for better alignment of regulatory timelines. In jurisdictions such as Thailand and the Philippines, participants anticipate transition challenges due to a lack of direction and guidance from local regulators. Second, there is a need for regulatory guidance on client communications relating to the IBOR transition, including guidelines around the timing, approach and required disclosures – without which participants said they are unable to commence client outreach.
Operations and systems: The study found that many local and foreign G-SIBs are well underway in conducting their preliminary impact analysis across business lines. Across APAC, sell-side firms have led IBOR transitions and helped raise awareness in the local markets. Buy-side firms, on the other hand, have shown limited progress in assessing operational and system readiness to understand how process flows and systems will be affected, while also lacking central programme management and coordination.
Due to uncertainty around the calculation of certain ARRs, particularly in smaller markets, only 17% of firms have fully defined a target operating model. Progress on transition planning in relation to legacy IBOR portfolios is also mixed in the region. A number of firms have also not yet planned their portfolio transition approach as they wait for a protocol from ISDA, and the majority of firms have yet to start any concrete implementation of system enhancements required to support the transition locally. Smaller firms also expressed concerns around vendor readiness, with some preparing potential workarounds to overcome this issue.
Only a limited number of firms in APAC have begun trading new IBOR products, although foreign G-SIBs are expected to begin trading first. The issuance of new products referencing ARRs remains slow in APAC, with many firms saying they are still in the planning phase. Firms that have issued new products say there is still limited market demand, but some are anticipating a first-mover advantage once demand picks up.
Risk management and modelling: The majority of the participants have started assessing how their IBOR transition will impact risk management, valuation, market and credit risk processes and systems. Only 8% of participants in the study had completed the risk identification and process assessment so far.
Many institutions have found it difficult to start risk modelling, as valuation parameters (e.g. term structure, fallback rates, etc.) have not yet been finalised. While 62% participants said they have the capability to run transition scenarios and measure the impact, these are mostly G-SIBs running their models from headquarters. Still, given the lack of market data to price instruments, modelling is recognised as being prone to error.
Contract inventory and remediation: The majority of foreign G-SIBs have considered using AI (artificial intelligence) and automation tools in their contract remediation efforts, given the vast number of contracts across different locations that need remediation. However, such solutions are largely driven from headquarters with limited involvement of APAC stakeholders. There is some concern from APAC stakeholders that centralised AI solutions might not be able to cater for local specificities. Likewise, some foreign G-SIBs plan to use manual processes to handle contract remediation in APAC operations, given the lower volumes.
The majority of firms have established an IBOR transition strategy for APAC in relation to fallbacks, however remediation of loans is seen to be the biggest challenge given the lack of clarity on fallback language. Lacking regulatory guidance, firms are taking different approaches in discussing fallback options with existing clients. While some firms have shared transition information with clients, very few relationship managers are actively discussing the topic. Many firms are still adopting a reactive approach to client communications.
The report, available here, outlines steps APAC firms should take in the next 12 months in their transition programmes.