Libor transition Taking Action in an Uncertain Environment

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LIBOR Transition
Abul HASNAT
Director – Risk, Regulatory and Finance
(917) 859-3864
abul.hasnat@sia-partners.com
Taking Action in an Uncertain Environment
April 2019
Theo RABOUIN
Senior Consultant
(646) 496-0160
theo.rabouin@sia-partners.com
Daniel H. CONNOR
CEO US
(862) 596-0649
daniel.connor@sia-partners.com

CONFIDENTIAL © Sia Partners 2
Impact of LIBOR’s Demise1
Alternate Rates Designated to Replace LIBOR2
Importance of Taking Action Now5
Key Steps in Preparing for the Transition4
• Identify Current LIBOR Exposure
• Determine Alternate Replacement Rate or Rates
• Modify Impacted Contracts to Reflect New Rates
• System and Process Changes to Handle Transition
Table of Contents
Conclusions and Key Takeaways6
About Sia Partners7
Differences Between SOFR and LIBOR3

CONFIDENTIAL © Sia PartnersCONFIDENTIAL © Sia Partners 3
Impact of LIBOR’s Demise
The London Interbank Offered Rate (LIBOR) has been the interest rate benchmark referenced by a wide array of derivatives, loans and securities
products for many decades. Scandals related to the manipulation of LIBOR have diminished confidence in its reliability and prompted regulators
and industry organizations to initiate efforts to find a suitable replacement.
 The Financial Conduct Authority (FCA), which has regulated LIBOR since 2013, announced in July 2017 that it will not compel or persuade
banks to make LIBOR submissions after December 31, 2021.
Anticipated complexity due to non-standardization
Anticipatedcomplexityduetovolume
OTC Derivatives
Exchange Traded Derivatives
Securitizations
Bonds
Business Loans
USD LIBOR product spread and complexity of transition
The impact of transitioning away from LIBOR cannot be overstated due to the massive footprint of products referencing LIBOR and the immense
planning and effort needed in order to manage the transition.
 Global footprint of $370 trillion gross outstanding
notional of instruments referencing LIBOR - USD
LIBOR accounts for $200 trillion
 Many outstanding questions with regards to
identifying a suitable replacement
 Organizations not operationally prepared to
support such a transition
 Millions of legal contracts tied to LIBOR
 Not guaranteed to be available after 2021
Source: Federal Reserve Bank of New York
Why it is a big deal
Consumer Loans

Alternate Rates Designated to Replace LIBOR
The Federal Reserve Bank of New York (NY FED) has established the Alternative Reference Rates Committee (ARRC) to help ensure a successful
transition from USD LIBOR to a more robust reference rate. In July of 2017, ARRC announced that the Secured Overnight Financing Rate (SOFR)
would be its recommended replacement for USD LIBOR.
While we explore the transition from USD LIBOR to SOFR, it is important to note that other regions have initiated similar efforts to find
replacements for LIBOR rates in other currencies.
 ARRC considered several criteria in determining its recommended
replacement, including the following:
1. Benchmark Quality
2. Methodological Quality
3. Accountability
4. Governance
5. Ease of Implementation
 ARRC has published a “Paced Transition Plan” to facilitate and
encourage the transition to SOFR
SOFR: description and background Alternate rates from other regions
TODAY
2012 July
LIBOR manipulation exposed
Calendar
2017 - June
ARRC recommends SOFR as
alternative to USD LIBOR
2018 - July
ARRC unveils indicative
SOFR term rate
2014 - November
ARRC established to find
alternative rate
European Union
ESTER - European Central Bank
United Kingdom
SONIA - Bank of England
Switzerland
SARON - SNB with SIX Swiss Exchange
Japan
TONAR - Bank of Japan
2019
Continue to build SOFR
linked instruments
2019 – H1
Develop transition plan for
move to SOFR and take action
2017 - July
FCA plans to no longer compel
submission of LIBOR past 2021
2021 – Q2
CCPs no longer accept new swap contracts
for clearing with EFFR as PAI and discounting
2021 – EoY
Create term-rate SOFR
Complete transition to SOFR
2019 – EoY
ISDA plans to amend
definitions and offer a protocol

LIBOR SOFR
Unsecured rate
(includes a built-in credit component)
Secured /
Unsecured
Secured rate
Seven maturities
(from overnight up to 12 months)
Maturity Overnight
$500 million
in daily underlying transactions for 3-mo. LIBOR
Volume
$800 billion
in daily underlying transactions
Mean of panel bank submission rates
(excluding several higher and lower rates)
Calculation
Volume weighted median
(for combined repo datasets)
11:55am (GMT) Publication Time 8:30am (EST)
ADVANTAGES DISADVANTAGES ADVANTAGES DISADVANTAGES
 Several different tenors
available
 More consistency
across regions using
different variations of
LIBOR
 Reduced confidence due
to manipulation scandals
 As the rate is unsecured,
additional risks are built-
in to adjust accordingly
Pros & Cons  Calculated based on
actual data, making it less
vulnerable to
manipulation
 Reflects fewer risks due
to being secured, so rate
is lower
 Only one maturity,
term rates have to be
created
 Adjustments are
needed to make it
more comparable to
LIBOR
Differences Between SOFR and LIBOR
SOFR is intended to be a more reliable benchmark than LIBOR and while there are some clear advantages in transitioning to SOFR.
 The differences between the two pose a challenge in administering the change.
VS

CEASE USE OF LIBOR
Key Steps in Preparing for the Transition
Systems and Processes
Much of the details around how SOFR will
work is still unclear, including whether
adjustments will be needed and what are the
other options if there is no forward term
SOFR available. Systems and processes must
be prepared for all possibilities as waiting for
resolutions to all issues may not be an option.
Identify LIBOR Exposure
In order to be fully aware of the impact of such
a transition, organizations must know their
exposure to LIBOR connected instruments. The
range and volume of this exposure will provide
guidance for the planning and immediate next
steps.
Modify Legal Contracts
Inventory of contracts referencing LIBOR
need to be amended to incorporate fallback
language in case of unavailability of LIBOR.
ISDA will help facilitate some of the
changes by proposing amendments but
organizations will be responsible for
implementing many of the changes.
Determine Replacement
Rate or Rates
While it’s clear that SOFR is the designated
replacement for USD LIBOR, the calculation of a
forward looking term rate is still unclear. Much of
this will be determined through industry
consensus and ARRC recommendations which
organizations must stay in tune with.
LIBOR Transition Program
The transition from LIBOR to SOFR will undoubtedly be a prolonged effort, making it critical to get a head start in not only planning, but also taking
action where possible. Waiting for the uncertainties to be sorted out risks leaving the organization unprepared and incapable of making the switch
within the timeframe communicated by regulators and industry organizations.
 Setting up a governance structure to execute and monitor the transition should be a top priority.

Identify Current LIBOR Exposure
Sia Partners employs Data Analytics and
Robotic Process Automation (RPA)
technology to review documentation
and identify link to LIBOR, essentially
automating a key aspect of the
identification process
Sia Partners insights
Identified risks
 Newly issued instruments linked to
LIBOR will increase the exposure and
the scope of the transition
 Manual processes are always more
time-consuming and prone to errors
such as omitting certain LIBOR-linked
instruments in the identification
process
Stakeholders to involve
 Business heads
 Technology and systems
 Legal and contract management
Key actions and considerations
# 1
 Review product inventory to determine
current exposure to LIBOR
 The exposures identified helps narrow the
contracts to be reviewed and amended
# 2
 Assess expiring contracts to determine
those expiring before LIBOR cessation
 Focus should be on contracts not expiring
until after 2021 and any new LIBOR linked
contracts issued
# 3
 Review contracts for any linkage to
LIBOR
 Automation can be leveraged to review and
classify contracts, as well as for remediation
# 4
 Define plan for a gradual migration of all
exposures
 Migrating all instruments at the same time
will not be feasible so a phased transition
will be needed
#5
 Identify businesses, functions, systems
and processes impacted
 Early identification will ensure engagement
from appropriate teams
Actions Considerations
Identifying the current exposure to USD LIBOR is the first step in planning for the transition

Determine Alternate Replacement Rate or Rates
Identified risks
 Risk managers may be delayed in
identifying impact of switch to LIBOR
 Delays in finalizing the methodologies
for adjustments and term SOFR
calculation can result in a risk of
reduced time to enact the changes
 Business leads
 Risk managers
Key questions and answers
# 1
 As SOFR is a secured rate lower than
LIBOR, will a spread adjustment be
needed to compensate?
 ISDA is developing a Credit spread
adjustment for derivatives and ARRC is
doing so for cash products
# 2
 How will a forward looking SOFR term
curve be developed?
 The Fed has published a methodology
paper and ARRC has also published an
indicative SOFR term curve
# 3
 What alternatives are available if an
IOSCO compliant term SOFR is not
available by the end of 2021?
 Alternatives being considered includes:
a. SOFR compounded in advance
b. SOFR compounded in arrears
c. Simple daily SOFR in arrears
SOFR Compounded in AdvanceOf the three alternative options,
what would be the preferred
second fallback rate option?
68%  16% selected up SOFR compounded in Arrears
 16% selected Daily simple SOFR in Arrears
SOFR is clearly the designated replacement for USD LIBOR, but many questions remain
Questions Answers
Source: Live poll of LSTA Operations Conference participants, April 9, 2019 (approximately 100 respondents)
The decision on SOFR spread
adjustments and forward looking term
rate cannot be made in isolation.
Industry consensus is critical, as is
preparation for all possible outcomes

Modify Impacted Contracts to Reflect New Rates
Identified risks
 Amending a large number of
contracts once LIBOR ceases will not
be practical
 Fallbacks should be thoroughly vetted
to prevent unintended consequences
 Legal
 Compliance
 Operations
# 1  What is fallback language?
 Fallback language governs what rate a loan
would revert to if LIBOR was no longer
available
# 2
 What considerations need to be taken
in determining the fallback language?
 Fallbacks have to consider a trigger event, a
replacement rate and adjustment
# 3
 What type of triggers can initiate the
transition from LIBOR to SOFR?
 Mandatory triggers: 2 ISDA triggers and 3
“pre-cessation” triggers have been proposed
 Early Opt-in triggers: helps reduce LIBOR
linked contracts prior to cessation
# 4
 Which contracts should be modified
first?
 It’s not practical to handle all amendments at
once so best to prioritize where possible
# 5
 Will adopting more robust contract
language lead regulators to treat the
amended contracts as new trades?
 This is currently being discussed in ARRC’s
Regulatory Issues working group
To amend existing contracts, clarity is needed on the new language to be used and the process for making changes
Questions Answers
Of estimated USD LIBOR contracts are maturing by 20211, leaving about 18% to be
amended. This represents millions of documents across the industry and does not
include newly issued contracts which do not mention an alternate rate.
Source: Federal Reserve staff calculations, BIS, Bloomberg, CME, DTCC, Shared National Credit, and JPMorgan Chase. Data are gross notional exposures as of year-end 2016
Contract amendments should be phased
to prioritize those with the highest
combination of clarity of new language
and volume
Robotic Process Automation (RPA)
technology can be used to scan
documents and identify mentions of
LIBOR and facilitate replacement
82%

System and Process Changes to Handle Transition
Identified risks
 Delaying the initiation of system
upgrades risks not having sufficient
time to thoroughly vet and test the
implemented solutions
 IT
 Business leads
# 1  Where will SOFR be sourced from?
 Possibility of making the rates available on
Bloomberg and Reuters screens is being
explored
 Planning can be started on identifying
systems that will need to source and
disseminate the rate information
# 2  What are vendor systems doing?
 Systems like LoanIQ will undoubtedly
accomodate for the new rates and being
aware of these changes can help to plan for
integration and ensure consistency
# 3
 What changes can be made to systems
before the intricacies of SOFR are
decided?
 While there is no final decision on the
spread and the term SOFR, it is clear that
systems will need to handle add-ons to
SOFR, possibly requiring additional fields
within existing systems
Enhancements to systems and processes can be time consuming, raising the urgency of getting a head start
Questions Answers
System enhancements can be initiated
to account for all possible outcomes.
New fields and ways to source data can
be anticipated. Vendor system changes
will require integration with internal
systems

Importance of Taking Action Now
For firms who are not yet aware, not yet engaged, and without plans to address their
LIBOR-related dependencies, I warn you again of the risks.
Andrew Bailey - CEO of the Financial Conduct Authority
The industry is struggling to move forward with the transition given the many uncertainties still needing clarification.
 However, the benefits of taking action now and preparing for all possibilities will far outweigh the costs associated with losing valuable time
waiting for outstanding issues to be resolved.
 Despite the warnings, firms are struggling
to mobilize their transition efforts.
 Some firms may be relying on LIBOR to
continue being published after 2021, while
others may be taking a wait-and-see
approach rather than taking a lead.
 Both approaches carry with them risks, as
transitioning all exposure simultaneously at
a latter date will prove to be impossible.
Industry unprepared for transition to SOFR
65%
Somewhat Knowledgeable Not prepared
How knowledgeable do you feel you
are on the LIBOR transition?
How prepared is your bank for
the transition away from LIBOR?
62%
 24% were not knowledgeable at all
 11% were very knowledgeable
 25% were somewhat prepared
 12% didn’t know
 1% were very prepared
Source: Live poll of LSTA Operations Conference participants, April 9, 2019 (approximately 100 respondents)

Conclusions and Key Takeaways
2. Stay Plugged-In 3. Gain the Advantage1. Mobilize the Organization
One benefit of dealing with an industry-
wide issue is that many aspects of the
solution can also be developed at the
broader level, reducing the risk of being
an outlier in approach.
In order to maintain consistency with the
methodologies being utilized throughout
the industry, it is critical to be aware of
recommendations and other guidelines
being published by organizations such
as ARRCand ISDA.
In addition to consuming the outputs of
such groups, they also serve as a
platform to raise any perceived issues.
The transition from LIBOR to SOFRwill
require prolonged engagement from
many functions within the organization.
Relevant stakeholders must be educated
regarding the impacts of the change and
be fully committed to seeing the
transformation through.
This endeavor can not be handled as a
Business as Usual (BAU) matter, and will
require appropriate project planning,
resourcing, and decision-making in a
timely fashion.
The scope of the challenge that awaits
demands that creative solutions are
explored.
Robotic Process Automation (RPA) will
make the difference between being
overwhelmed by the volume of
documentation to be amended and
having a relatively uneventful transition.
Data analytics can provide a pivotal
advantage in not only identifying the
impacted contracts but also in
facilitating the necessary changes.

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