The move to replace LIBOR by the end of 2021 is a unique event in financial history and one of the most complex projects ever undertaken in the financial services industry. Implementing a replacement rate, crafting fallback language and providing the blueprint for a paced transition are critical guideposts for the journey ahead.
Despite the many challenges and setbacks that COVID-19 has presented, the sense of urgency among regulators and other market participants has not diminished, nor has the proposed timeline. As such, the recent introduction of a SOFR-LIBOR spread adjustment methodology for cash products and the launch of ARM products indexed to SOFR show the tracks continue to be laid for an inevitable transition. However, many financial institutions have fallen behind in their plans for the transition, as previous plans have been waylaid by the pandemic and the facilitation of CARES Act stimulus packages.
LIBOR Transition: A Challenge and An Opportunity
Effectively managing the transition to LIBOR is about much more than a one-off communication. Appropriately managing the communications process with stakeholders ranging from policymakers to clients can mean the difference between solidifying trust and losing it.
One cautionary tale comes from Europe, where the Swiss National Bank (SNB) made an unannounced move to unpeg the Swiss franc from the euro in 2015. The Swiss franc had long been considered a “safe haven” asset due to the balanced budget and neutral political environment. As investors flocked to purchase the Swiss franc, the SNB printed new francs to buy euros, causing massive devaluation. With a new quantitative easing program looming and threatening further damage to its currency, the SNB announced it would scrap its currency peg to the euro on Jan. 15, 2015 without forewarning.
Although one might argue that the reasons for the unpegging were sound, the abruptness of the change and lack of advanced communication sent currency markets into a freefall. The Swiss franc dropped 30% against the dollar and the euro within an hour, marking the largest one-day move by a major currency since World War I.
Taking your stakeholders from initial awareness to a level of comfort where they are “bought in” requires paced and consistent outreach through a variety of communication channels that touch myriad use cases. In the case of the LIBOR transition, what is the customer experience when clients interact with a mortgage broker, when they call a customer hotline and/or when they inquire about their small business loan? What happens if the customer uses two banks who opt for two different benchmarks? Explaining a move to SOFR is complex enough, but it is further complicated by available alternatives. How will regional banks choosing to use Ameribor explain the discrepancies and merits? Do your employees know why you’re choosing one rate over another?
Start Communicating Now
Financial institutions impacted by LIBOR need to begin now. Effective communication will demonstrate your understanding of the change’s impact and show you have a plan to assess and manage LIBOR exposures. Many stakeholders are not aware of its implications, and informing them on what LIBOR is, why it matters and key timelines is an important first step. On a project as complex as this, you can never educate too early, nor too much.
One Size Does Not Fit All
The LIBOR transition will touch millions. Everyone involved, from institutional counterparties to adjustable rate mortgage holders, will have different questions. Identifying these needs and specifying the appropriate outreach is crucial. You must develop and tailor messages and materials for each type of stakeholder, with clear objectives in mind. Some will need to be proactively engaged and others will require a reactive approach. Some will need their expectations managed and others will just want to be kept informed to better understand the implications. Developing communication protocols, clear timelines and trigger points for communicating is important. Everyone also must prepare for tough conversations,because they will happen, particularly with client-facing staff where the impact is more pronounced.
Manage the Uncertainty.
There are a few key communication stages, or trigger points, for communication around LIBOR. Managing each of these stages effectively will help to retain trust and credibility and minimize disruption.
- Recognize progress: The first communication in relation to LIBOR is a recognition of the challenge ahead and progress to date. This also provides the opportunity to articulate why your firm is well placed to manage the transition.
- Acknowledge challenges: Once analysis of your firm’s LIBOR exposure is understood, you have the opportunity to give stakeholders a broad overview of the anticipated impacts of the transition and an overview of the considerations that your organization must overcome to address them. For example, if SOFR is the rate you choose to use, how are you addressing the inherent lack of credit risk?
- Articulate objectives, rationale and action items: Once the impact of the LIBOR transition is understood, you can then articulate your decisions to stakeholders and outline what needs to be done. This will be particularly important if you choose to use a benchmark such as Ameribor instead of SOFR. which has received the backing of the Alternative Reference Rates Committee.
- Look to the future: The “go-live” of the transition provides the opportunity to reiterate the scale and breadth of the project.
A strategic, planned and proactive communication strategy will go a long way toward providing a confident vision of the future and a clear and reassuring sense that your institution is prepared for the future state.
The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Editor’s Note: The original version of this article incorrectly said Ameribor, instead of SOFR, is backed by the Alternative Reference Rates Committee. The article has been corrected. We apologize for the error.