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John Pucciarelli, Head of Industry & Regulatory Strategy at AcadiaSoft

Since the mid-1980’s, Interbank Offered Rates, or IBOR, have been used as a key global benchmark to price and value a whole host of financial products, including loans, bonds and derivatives. But things are set to change, with regulators looking to phase out IBORs for new Risk-Free Rates, or RFRs, by the end of next year. Many of you might be wondering why this is happening and what it might mean for you or global financial markets more broadly. In our latest Ahead of the Curve podcast, I was joined by Ann Battle Head of Benchmark Reform at ISDA to explore exactly that, and consider why these reforms are happening.

Why are we seeing a move from IBORs to RFRs?

Ann told us that the key reason for moving away from IBORs is essentially two-fold:

• To move the bulk of financial markets to rates that are considered more “robust” and built on actual transactions in the market.
• Because, in the case of Libor, due to the increased liability they are exposed to, panel banks are no longer willing to continue submitting.

A rate built on panel bank submissions when the panel banks are exposed to too much liability for submitting is not a sustainable rate, and that has proven to be true in the case of Libor. The market simply must find an alternative, otherwise, there will be no interest rate. This is the stark reality of the current situation.

Market moves in the cleared and the bilateral OTC space

At AcadiaSoft, we have already seen moves towards Risk-Free Rates as part of the global industry efforts around benchmark reform.

We’re seeing a lot of movement in the cleared space, it’s happening now. CCP’s in the cleared space have already moved towards the new rates in a ‘big bang’ way, so to speak.

In the bilateral space, we won’t see the same ‘big bang’ impact. It’ll be more of a measured bilateral approach, meaning as it’s not designed like the cleared world, it won’t go all at once.

How will the switch impact firms?

One of the main considerations that we’re seeing is from a credit support annex or CSA perspective. Discounting in the bilateral space will factor in, so firms are now looking at their remediation plans and wondering how discounting using Libor in the CSA, and moving to Risk-Free Rates, will affect their swap pricing. There are several different routes a firm can take, all of which may cause some challenges in terms of swap pricing. We’re talking to our clients about this, as generally speaking it translates down into your collateral management process. If you have two CSAs, you’re going to be calculating potentially two different margin calls. I’d guess that most firms probably don’t want to do that.

Helping you navigate the switch

The message that things need to change is clear, but how you go about it perhaps isn’t. There’s a lot of good information out there to help, so the challenge the industry faces is around getting that message across. ISDA is doing a lot of great work to facilitate this, and we’re trying to do our part here at AcadiaSoft as well.

Naturally, there are going to be a lot of questions being asked as firms come to terms with such a big move. There are a host of tools and collateral management solutions out there which can help you, be it to better understand what the pricing implication is going to be on a particular swap trade, or how the protocol is going to work and so on. Given the issues around CSAs I mentioned, there is an opportunity to use some of these tools to understand how to change your legal documentation as well. One way you can go, is to pull all your documents together and then have people run through them for you. A few technology providers, like us and others, can help you do that.

To hear our full conversation, check out the latest Ahead of the Curve Podcast here. If you want to know how we can help you prepare with the switch from IBOR, please get in touch with us.

About John Pucciarelli

John Pucciarelli joined AcadiaSoft in 2019 as Director of Strategic Initiatives. John is leading AcadiaSoft’s outreach to IM phase 5 and 6 firms building on his knowledge and experience. John was previously with The International Swaps and Derivatives Association (ISDA) as Director of Market Infrastructure and Technology. John led margin and collateral Initiatives for the ISDA membership overseeing the implementation of the initial phases of the noncleared margin rules from an operations and business perspective.
Prior to joining ISDA, John was with AQR Capital Management where he oversaw their middle office operational functions. Earlier on in his career, John worked for UBS Investment Bank where he supervised their US Equity Prime Brokerage Operations team.

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