EU BENCHMARK REGULATION AND IBOR REFORM - THE FUTURE OF BENCHMARK RATES - JUNE 2019 - PWC
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
June 2019
EU Benchmark Regulation
and IBOR Reform
The Future of Benchmark Rates
Building relationships, creating value
Benchmark users need to prepare for transition IBOR Reform timeline
to new benchmarks as response to the EU Jul 2014
Bench-mark Regulation and market FSB Benchmarks Report
initiating changes
Apr-Jun 2017
developments Regulatory working
groups started sharing
Jul 2017 proposals f or
alternativ e benchmark
FCA’s Chief executiv e rates
EU Benchmark Regulation speech to IBOR’s f uture
• The EU Benchmark Regulation (EU BMR) introduces new compliance Q1 2018
requirements for benchmark administrators, contributors and users ISDA Roadmap
with effective date January 1, 2018 (transition period for certain released and report to
be published on the
requirements) Apr 2018 transition outlined
• As of January 1, 2018, benchmark users are required to create and SOFR and ref ormed
maintain robust written plans to identify measures that come into effect SONIA published May 2018
with cession or modification of an existing benchmark SOFR and ref ormed
• After January 1, 2020, only BMR compliant benchmarks (provided by Q2 2018 SONIA f utures launched
registered or authorized administrator) may be used in new contracts Trading started on
• For legacy contracts, non-compliant benchmarks can still be used alternativ e benchmarks, Q3 2018
incl. f utures and swaps ECB consultations to
after January 1, 2020 subject to a decision by the competent authority
transition and term-
of the administrator’s Member State structure launched af ter
• EU institutions agreed to grant an extension by two extra years for €STR to become RFR
critical benchmarks and benchmarks from third country administrators Today
until December 31, 2021
Jan 2020
Jan 2022 EU Benchmark
authorization
Contributor banks no longer deadline
compelled to submit IBORs
IBOR reform
• The commitment of panel banks to support the quotation of existing
Existing IBOR rate(s) Successor Borrowing Type
IBORs expires after 2021
• At latest by 2022 new, risk-free interest rates, which are based (mostly) EURIBOR / EUR LIBOR €STR Unsecured
on real market transactions, should have replaced the old reference USD LIBOR SOFR Secured
interest rates
GBP LIBOR SONIA (new) Unsecured
• Working groups from jurisdictions across the world have proposed
alternative reference rates or are working to substantially strengthen CHF LIBOR SARON Secured
existing rates JPY LIBOR, TIBOR TONAR Unsecured
For a limited time period, a recalibrated EONIA
(€STR plus Spread) and €STR will be published
EONIA Pre-€STR New EONIA
in parallel with clean discounting€STR Daily Spread Trim. 1Y-Avg. Spread
• €STR will be published as
-0,20 0,25
successor to EONIA from 2
Spread in %
Rate in %
October 2019 – currently a
so-called pre-€STR is being -0,25 October 2019
onw ards under 0,20
published. the new
• Under a time-limited recali- Methodology
-0,30
bration approach (up to end- 0,15
2021) with a fixed spread,
-0,35 EONIA = €STR + Spread
EONIA will be directly linked
to €STR. Average Spread 0,10
• The parallel approach allows -0,40
for orderly transition and
sufficient time for transferring 0,05
-0,45
current EONIA liquidity to the Published €STR
emergent €STR market
-0,50 0,00
• Use of a single discounting 03-2017 09-2017 03-2018 09-2018 03-2019 09-2019 03-2020 09-2020
regime encourages transfer of
Source: ECB Data, PwC analysis: Data for EONIA and Pre-€STR available until end of February 2019; Data from March 2019 to October 2019
liquidity from EONIA to €STR are simulated; Average Spread was calculated with Data from October 2018 to October 2019
• Both, €STR and recalibrated
EONIA Pre-€STR New EONIA
EONIA will be published T+1
€STR Daily Spread Trim. 1Y-Avg. Spread
-0,20 0,25
ead in %
ate in %
-0,25 October 2019
Challenges in implementing the requirements of the EU BMR and the
IBOR reform are affecting a large number of areas
• Evaluate the impact of new hedge accounting standards • Maintain sufficient liquidity in IBOR hedging instruments
Evaluate
• the impact
Identify of new
criteria thathedge
wouldaccounting standards
trigger evaluation of hedges • • Maintain
Align timing sufficient
of migration liquidity in product
of underlying IBOR hedging instrume
Identify
• criteria
Identifythat
taxwimpact
ould trigger evaluation
triggered of hedges
by change in interest • Align timing of migration of underlying product
Identify tax impact triggered by change in interest
calculation
calculation Tax,
Account- IBOR
• Develop engagement approach ing and Market
• Develop term structure on O/N
and strategy across multiple other Liquidity • Develop term structure on O/N rates
Develop engagement approach rates
businesses and regionsand impacts
strategy across multiple businesses and •• Define and
Define and incorporate
incorporate fallbacks for
• Reconcile changes in contracts maturing aftermaturing
2021
regions fallbacks for contracts
benchmarks across and meet Market New • Build 2021
liquidity in new products
Reconcile changes in benchmarks across after
phased transition dates across Outreach Bench-
and meet phased transition dates across • Build liquidity in new products
jurisdictions
jurisdictions & Consis- mark
• Coordinate customer outreach tency Markets
Coordinate customer outreach across EU BMR and
across business
business IBOR reform
transition • Identify, enhance and validate
• Assess all operational and • Identify,
models enhance and validate models
challenges required
required to switch
technological impact across Systems & Risk and • Developto sw series
time itch of data for
business lines and corporate Process Valuation • Develop
risk and time series
capital of data for risk an
models
Assess all operational and technological capital models
functions
impact across business lines and corporate Change Models • Develop framework for
functionsConsider changes to internal
• • Develop framew
simulation of new orkrates
for simulation of
new rates for
andcapital and funding
Consider and external
changes systems,
to internal and external for capital funding
requirements
systems,processes,
processes,andand dependencies
dependencies Contract
requirements
Contract
Remedi-
• Group contracts requiring new language Discovery
ation
Group
• contracts
Leverage requiring
industrynew language
efforts for consistent • Identify all contracts with direct or
Leveragecontract
industry remediation
efforts for consistent contract remediation • Identify all contracts
indirect exposure with direct or indirect exposure
•
Determine Determine
timeline oftimeline
contractofremediation
contract remediation • • Evaluate
Evaluate and assess
and assess existing
existing fallbacks
fallbacks
• Incentivize
Incentivize clients to renegotiate
clients to renegotiate • • Digitize
Digitize all relevant
all relevant contracts
contracts
Challenges in implementing the requirements of the EU BMR
and the IBOR reform are affecting a large number of areas
Mobilization
• Conduct a organization-wide scoping exercise to ensure that all impacted stakeholders are aware and
involved in discussions and a consistent understanding is established
• Establish a working group with representatives from all impacted areas of the bank for the ongoing
management of the transition period
• Join and participate in relevant working groups to remain current on the developments of the LIBOR
reform and the guidance provided by regulators and industry groups
Impact analysis and development of a roadmap
• Define, communicate and continuously monitor firm-wide scenarios for the transition to new rates
• Conduct an initial impact assessment to develop a high-level understanding of how the bank is
impacted across the organization differentiating between legacy and new business
• Quantify the exposure (direct and indirect) in the relevant reference rates
• Assess the risks associated with the transition to new reference rates
• Develop initial draft of the roadmap for the transition period
Short-term strategic priorities
• Assess and potentially replace fallback language in contracts for new business
• Run new product approval processes to allow trading in new reference rates
• Prepare a communication strategy to be able to respond to requests from your customers
The definition of several transition scenarios reflects the remaining
uncertainty and facilitates the impact and risk assessment
Definition
Definition of transition
of transition scenarios
scenarios Quantification ofexposures
Quantification of exposures
• • Definition of 3-5
Definition of 3-5scenarios
scenariosbased
basedonon
potential
• Identification of exposures (di-
• Identification of exposures
potential rect/indirect) in relevant interest
transition transition
alternativesalternatives or by
or by currency (direct/indirect) in relevant interest rate
rate benchmarks (e.g. USD
• currency
Description of important assumptions for each benchmarks (e.g. USD LIBOR, EONIA,
LIBOR, EONIA, EURIBOR)
• Description of important assumptions
identified scenario
for each identified scenario • EURIBOR)
Analysis and illustration of expo-
• Identification of • Analysis
sures and illustration
in various of exposures
dimensions and in
• Identification ofaabasis
basisscenario
scenarioasas
foundation
for the impact and risk analysis various dimensions
aggregation and(e.g.
levels aggregation
business
foundation for the impact and risk
analysis levels (e.g. business
function, reference function, reference
rate, region,
maturity
rate, bucket) bucket)
region, maturity
• Identification of run-off profile to
• Identification of run-off profile to inform
Input inform about transition strategy
about transition strategy and definition of
to build a and definition of an ongoing
an ongoing process
roadmap for the process
Risk analysis
transition Impact analysis
Risk analysis Impact analysis
• Definition of key level 1 und 2 risks • Identification of required chang-
• resulting
Definitionfrom
of key level
the 1 und 2to
transition risks
new • Identification
es along the of value
required changes
chain and as-
resulting from
reference ratesthe transitionthe
following to new
internal along the value
sessment chain andefforts and
of required
reference
risk rates following the internal risk
taxonomy assessment
complexityofdue required
to theefforts and
replace-
• taxonomy
Risk assessment for each scenario ment of existing
complexity rates
due to the based onof
replacement
• (H/M/L or relativefor
Risk assessment risk in comparison
each to
scenario (H/M/L the identified
existing baseoncase
rates based the identified
base scenario)
or relative risk in comparison to base • base
Execution
case based on assump-
• Development
scenario)
of actions to be taken to tions of Base Case along the
• Execution based on assumptions of
mitigate identified risks front-to back process chain
• Development of actions to be taken to Base Case along the front-to back
mitigate identified risks process chain
Our proven PwC tools can help and support you in the
arising challenges emerging from the transition
Impact Exposure Semantic Contract Outreach & PwC
Assesment Monitoring Analysis Repapering FIVE
Primary Purpose Primary Purpose Primary Purpose Primary Purpose Primary Purpose
Facilitate and acceler- Identify and visualize Discover and extract Connect and commu- Provide and use a
ate an enterprise wide relevant data on all relevant parameters and nicate with all affected modular valuation and
impact analysis from products, contracts content from affected clients in a collaboration IT infrastructure for
the IBOR cessation and customers that contracts and other and outreach platform affected contracts and
across business units, have a link to IBOR documents product
regions, products and Target
operations Target Target Achieve better com- Target
Review and track Extract and structure munication and faster Analyze and simulate
Target quantitative impacts data, analyze each documents gathering any effects and quan-
Create and assess before, while and after component consistently as well as work smarter titative impacts arising
robust written plan the transition period in as well as in clusters or including tracking and on profit and loss and
and action progress a detailed Dashboard filter and sort by param- reporting market value changes
using input as well as view eters
identify most import-
ant next steps
Our references from ongoing and completed Project insights
Currently, we support a German bank in
projects in IBOR transition presents PwC as performing a pre-study on the reference rate
reform
industry leader and reliable partner for you
Project goals
Assessing the technical implementation effort to
Client EU-BMR IBOR Reform represent €STR in client systems (Front to back)
Impact assessment on hedge accounting and
Major international bank
other financial statement components
Major international bank Setting up a roadmap for a detailed concept and
Major international bank implementation including a proposal for project
structure and milestones
Major international asset manager
In addition setup of project organization,
Major German bank communication and project phases to perform the
pre-study
Regional German bank
Market inf rastructure
Efficiency Relevant products
Expert knowledge Strategic advantage
Due to our experience 1. Implementation
PwC has extensive PwC established an
and tools we stand for “Floater using €STR reference rate“
experience in the internal Reference
efficient methodologies 2. Implementation
implementation of the Rate Reform working
and implementation “Floating loans with alternative
EU BMR and the IBOR group to combine our
processes to fulfill reference rate”
reform – in addition expertise globally and
project expectations 3. Substitution of EONIA
you will benefit from exchange latest market
which enables us to as reference rate in CSA by €STR
our interaction with developments – you
close projects in time 4. Substitution of EONIA
local and international will gain an strategic
as reference rate in contracts including
working groups advantage
safeguarding of credits by €STR
Our references from ongoing and completed projects in IBOR transition presents
PwC as industry leader and reliable partner for you
In order to respond to the various potential implementation challenges,
PwC involves experts from various competence teams
Our Experience and Capabilities Benefits
Ongoing client projects
• PwC has access to up-to-date,
PwC actively supports the IBOR and Reference Rate Reform projects for
directly relevant experience
numerous clients, including the impact assessment, mobilisation program
• We apply our knowledge and
and governance structure, and preparation for client and customer outreach
learnings from previous projects,
initiatives.
Accounting,
but also from our experience
Tax& Legal
in managing complex change
Knowledge Centre
programs combining a whole
We keep abreast of regulatory developments, their implications for our clients
range of expertise
and of the progress of ongoing projects. We discuss market standards, obtain
insights from associations/regulators and take part in the debate of significant
Treasury & Risk
issues. • PwC can assist you in the
Communication Management
navigation of the uncertainties
Monitoring und dialogue with industry groups associated with the transition
Pricing,
PwC maintains long-term relationships with the leading industry groups that • Our broad engagement across
play important role in the IBOR transition to alternative reference rates. We the various industry participants
have organized and hosted numerous industry-specific events and frequently allows us to stay abreast of
publish insights and analysis on the IBOR transition and the related topics. market developments and
Operations &
support you in planning for the
Cooperation with working groups
Strategy,
various transition scenarios
PwC is a member of the working group “Sterling Risk-Free Rates” of the sub-
group “Communication & Outreach”. We expect to join other working groups
in the future. • Our team can provide you with
insights and knowledge from all
Technologies
Global coordination and tool development of our IBOR transition efforts
PwC experts meet regularly to discuss current market developments and • Our tools can support a
keep our methodologies and tools up-to-date. Our IBOR capabilities are more efficient transition, with
Tools &
supported by a number of tools accelerating the impact assessment, contract sustainable benefits
amendment process, and other components of the transition.
Vil du vide mere?
For uddybende spørgsmål - eller har du brug for konkret rådgivning mht. IBOR transitionen og
reference rente reformen - så er du altid velkommen til at kontakte vores team, der er specialister
indenfor regulering, risiko og kapital i den finansielle sektor.
Financial Markets & Risk tilbyder rådgivning i forbindelse med regulatoriske forandringer og
bidrager med ekspertviden indenfor finansiel risikostyring, optimering af regulatorisk kapital samt
markedsregulering. Vi har indenfor de seneste 4 år arbejdet intenst i Danmark og i Europa med bl.a.
MiFID II, Basel IV, FRTB og EBA guidelines, samt ændringer i investeringsstrategi mod alternative
investeringer. Vores dybe forståelse af vores kunders forretningsmodel og operating model er med
til at målrette vores rådgivning, og gør at vi altid stiller med det stærkeste team af bl.a. økonomi- og
risikoeksperter, jurister, proces eksperter, data arkitekter, og analytikere.
Frank Svendsen Nørring
Director, Head of Risk & Capital Markets Advisory
M: +45 5124 1058
E: frank.norring@pwc.com
Haris Khan
Manager
M: +45 3070 3916
E: haris.d.khan@pwc.com
Johan Hilsted
Manager
M: +45 5135 0028
E: johan.hilsted@pwc.com
Gregers Inselmann
Manager
M: +45 3150 6056
E: inselmann.gregers@pwc.com
Patrick Sommer
Senior Associate
M: +45 3056 7939
E: patrick.sommer@pwc.com
Revision. Skat. Rådgivning.
You can also read
