AGEFI Luxembourg - septembre 2021

AGEFI Luxembourg 46 Septembre 2021 Informatique financière F ollowing several manipulation cases in 2012, central banks and regulators decided to discontinue Libors/Eonia as reliable benchmark interest rates as from January 3rd 2022 including some transitory regimes up to June 2023. They provided guidance on related transitions (alternative rates, Conduct Risk practices expected, benchmarks regulation, and for buy side, performance fees manage- ment…) and advised that risk-free rates (RFRs) to be based on transaction public data rather than solely on banks submis- sions, diminishing concerns raised over Libor rates’ representativeness, transpa- rency, and questions regarding fair treat- ment of end investors. This transition brought some degrees of com- plexity with broad impacts levels, given respec- tive market references, locations, conditions (pro- duct impacted, liquidity) but also opportunities in which flexibilities were progressively introdu- ced. Market associations therefore engaged consultations on specific topics, such as ISDA/fallbacks, ICE/Libors publication calendar, as well as ICMA, EIOPAand the like. Central banks and regulators favour overnight risk-free rates. Market data providers proposed more options to this transition, such as alternative rates, especially in USDmarkets with credit sensi- tive components (BSBY by Bloomberg, Ameribor byAMX, CRITR/CRITS from IHSMarkit), poised more adapted to specific transactions. Considered by regulators as too similar to former Libors with underlying markets (commercial papers, certificates of deposits) and not “liquid enough” (cf commercial papers credit crunch in March 2020), those credit-sensitive rates are hence designed to complement SOFR rather than replace it. Alternative RFRs : a challenge? As overnight RFRs are chosen by regulators as alternatives to Libors and EONIA, term structure considerations arose, with market participants using different tenors in their funding and invest- ment activities. As a result, working groups have considered a forward-looking approach based on these RFRs. Establishedmarkets likeGBP shall use an in-arrears approach for SONIA. Term SONIA has been recently introduced. Other markets like USD shall use both approaches (in-arrears and in- advance SOFR are respectively used for FRNs and consumer loans). The Financial Stability Board recently issued recommendations (extensive use of overnight RFRs) and will publish progress reports over Q4 2021. To facilitate RFRs adoption, regulators launched several consultations related to RFRs adoption similar to the one for linear derivatives. Swaps are deemed to be strong drivers for other derivatives practices (cross-currency swaps, non-linear deri- vatives, future contracts…). The UK Financial Conduct Authority (FCA) recommended SONIA quotation for swaps from March 2020 onward. Despite the Covid-19 pandemic, an increase in SONIAtraded volumeswas observed as a SONIA adoption for derivatives and cash markets. Regarding GBP and JPYLibors, the FCAopened a consultation on June 24th 2021 regarding 1-month, 3-month and 6-month synthetic Libors implemen- tations starting January 2022. FCA’s final decisions on those rates will be taken during Q4 2021. Further flexibility introduced by regulators Regulators induced flexibility regarding transition timelines dependent on market constraints, namely specific Libors publication extension, syn- thetic Libors, ARRC, CFTC on SOFR initiatives, EuropeanCommission on EONIAstatutory repla- cement by € STR + 8,5bp to address potential non- transitioned contracts. The FCA announced an extension of publication of several tenors of GBP, USDand JPYLibors from December 2021 to 2022 or 2023 in order to give more time to amend documentation, contracts or to allow for short dated financial instruments to mature to reduce the scope of financial instruments to be transitioned. It also introduced synthetic Libor based on forward-looking term RFRs. Regulators and market players prefer to move to overnight rates compounded in arrears as they reflect the genuine interest rate for that relevant period of reference rather than a historic period or a projected given rate. To strengthen USD to SOFR markets’ transition, CFTC’s Interest Rate Benchmark Reform Subcommittee recommended from July 26th 2021 to use Interdealer Swap Market Trading Conventions based on SOFR (from USD Libors ones). Related swaps traded volume doubled bet- ween July 26th andAugust 15th, like SONIAquo- tation for GBP swaps in March 2020, triggering a significant increase in derivatives turnover in SONIA.Monitoredvolumeswill suggest adoption trends and transition pace for coming months. Bonds showed a high adoption rate with SOFR and SONIAbeing used by issuers, even if themar- ket is still tiny for floating-rate notes. Further publications are still expected on synthetic Libors use (GBP, JPY), on transition progress from JPY Libor to TONA and from SOR to SORA and conversion of legacy Libor contracts to RFRs contracts or with insertion of robust fallbacks, impacting Conduct Risk management. Sell side / buy side specific approaches Although financial institutions initiated risk-free rates transition in 2019, ending in 2021with its final phase, teamswill be busywith clientmanagement and related contracts update and cross coordina- tionwith other projects and regulations, like SFDR, performance fees ESMAdirective, … . Whilst interconnected and in a global transition context of key market structuring elements, both sell side and buy side have their own pace of change and specific approaches. On the Investment Banks’ side, Libor transition project teams aggregated cross asset class impacts through layers of RFR related financial instruments inventories to provide a comprehensive view of their respective book of impacted transactions, whilst assetmanagers had to deal with other issues such as specific product topics aroundmoneymar- kets funds too, and also complex distribution chan- nels for instance through the adaptation of their respective legal and marketing documentation. Multi-boutiques models, providing some mar- keting edge to competitors, or increased out- sourcing operating models, and the use of exter- nalized trading desks, increased the items’ agenda for an orderly transition, with different levels of impacts. The latter includes exposures, maturities to be considered at different group or related entities levels, multiplying the number of people to be engaged on very specific issues for a global transition. On the sell side, more specifically, the three main pillars identified were, first, revisiting product offering, given new indexes emerged with alter- native term rates to be offered for derivatives and cash products as amain priority and, in particular, reviewing their institutional client specific expec- tations, given their will to be engaged. The second pillar consists of deep changes from alternative term rates that were introduced in IT Infrastructure, operating models (Risks models, stress tests, var, metrics) with specific attention points to nonlinear model transition, derivatives valorisation (such as combined ones, e.g. Swaptions), hedging risks (different fallbacks for the two legs of the transaction). The third pillar is conduct risks practices and controls with a focus on value transfer to ensure end investor protection and right trade off output allocations as a particular point of interest for regu- lators such as FCA given complexities due to spread of business activities and related remune- ration conditions. Focus on impacted financial instruments As bonds, derivatives, loans, structured products are impacted, ICMA, ISDA, LMA, EIOPA consul- tations must be followed to have guidance on documentation updates. Bilateral negotiation will take place to amend master agreements and rela- ted repo/securities lending transactions. Loans’ transition is still to be closely monitored. Various actors confirmed their needs to increase their effort to be engaged through a significant number of bilateral negotiations with options remaining on credit spreads to be agreed. EONIA/ € STR spread is capped at 8,5bp sugges- ting smooth negotiations. USD Libor/SOFR sug- gests several approaches, with higher spreads (26,2 bp on 3-month tenor), involving credit sensitive rates. Phased approaches depending on currencies, tenors impacted can be designed (with some prio- rities by January 2022, and other USD, GBP, JPY loans to be amended over 2022, 2023). Counterparties onderivatives (mostly swaps), cash and loan transactions shall enter negotiations to agree on transition choice (risk-free rate conver- sion, applicable spread, fixed rate conversion, pre- payment…). This operational phase should be carefully managed as many uncertainties arise (negotiations length, counterparties responsive- ness, repapering, business as usual at year-end…). Many institutions recently reinforced their set up with dedicated teams to address their legacy port- folios transitions to meet regulatory deadlines as they are suggested. Risk-free Rates transitions: where should Asset Managers concentrate their efforts? Buy side institutions shall handle legal documen- tationupdates through their fundsKIIDs andpros- pectus whereas identified RFRs benchmarks are based on Libors, EONIA. Achange of index leads to a modification of the KIIDs and prospectus for investment funds (magnitude of impact assess- ment is needed for collective investment vehicles) or an amendment of mandates and agreements after proper liaison with clients given the nature of the changes to be made. These updates shall also involve some of asset managers, management companies’ external pro- viders such as custodians, fund administrators, reporting engine providers, adding substantial workload in critical periods (end 2021, end of quar- ters, annual report date) while considering impacts fromother regulations (SFDR, ESMAperformance fees directive...). In general, initial assessments and set up, led investment firms tomap, first, their ope- rational impacts: IT systems, front-to-back pro- cesses, risk engines (quantitative models using Libors, EONIA must be adapted), and secondly, their connectivity and flows with settlement ser- vices providers. The review of the KIIDs and prospectus includes an analysis of the type of reference index, the pre- sence or absence of performance fees and the nature of the fund, whether it is an open-ended, a dedicated, a money market or fund of funds... Complexity of implementation varies depending on the nature of the funds. Master agreements, repo, securities lending trans- actions should be reviewed as well, with bilateral negotiations and/or protocol adherence helping the transition. On product side, Libors, EONIAcan be mentioned at investment funds levels, as a benchmark for comparison purposes or for per- formance purposes, particularly when the invest- ment objective is to outperform the latter. Investment management mandates and agree- ments can also use Libors, EONIA. Particular focus shall be made on funds with per- formance fees, money market funds. Possible switch dates range might be smaller compared to other funds. Tomanage only one performance cal- culation model, the accounting cut-off date could be preferred. However, ESMA 34-39-992 directive on performance fees calculation and disclosure must also be considered and can suggest alterna- tive switch dates. For money market funds, impacts of change on performance fees must be identified along the different processes (perfor- mance fees calculation matrix, liaison with custo- mers) and choice of spread. In addition, a bearer letter could be used for client communication, under specific conditions. From an operational point of view, especially for fund administration, performance fees computa- tion may remain a challenge, especially for daily and weekly NAV funds. These require constant mobilisation of the accounting and IT teams. One issue consists in the automation of perfor- mance fee calculations in IT systems, while at the same time offering the possibility of customised calculations. The latter option could entail signifi- cant development costs that could be approached also on a case-by-case basis. With Funds markets more and more concentrated with ever larger volumes of funds to be processed with multiple compartments, share classes, such automation the- refore requires reviews of related workflows to integrate or digitalize these calculations. This move towards standardisation is also part of a regulatory framework requiring more andmore transparency, would question performance fees given funds types (money market, multi-asset, debt, equity, etc.). To conclude, upon final consultations outcomes to be published, industry actors’ level of engagement needed tomeet January 3rd 2022, and further tran- sitiondeadlines, will balance between keeping agi- lity formarket opportunities offered and readiness on latest contracts updates or bilateral negotiations, other regulations, year-end business as usual acti- vities from KIIDs annual updates to for instance SFDR January 2022milestone, ESMAperformance fees directive application. Alain BOUICHOU, Directeur Danh VU, Manager Aymeric KERGUEN, Senior Consultant Sevinç ÖZCAN, Senior Consultant Wavestone In January 2022, Libor or not Libor? F in août 2021, la plateforme transactionnelle MyGui- chet.lu a battu son propre record en dépassant les 2,6 mil- lions de transmissions de dé- marches administratives de la part de citoyens ou d'entreprises aux administrations de l'Etat. Il s'agit d'une progression de 146% par rapport à la même pé- riode en 2020. Ces chiffres sans précédent sont prin- cipalement dus à des démarches liées à la crise sanitaire. Cependant, les sta- tistiques confirment également une progression soutenue quant à la trans- mission de démarches non liées à la pandémie qui, si l'on compare les 8 premiers mois de 2020 à ceux de 2021, vient se situer à plus de 40%. Le ministère de la Digitalisation et son bras technologique, le Centre des tech- nologies de l'information de l'Etat, se félicitent de cette progression qui vient corroborer le travail accompli dans le domaine de l'offre de démarches en ligne et de développement des ser- vices étatiques digitaux. Elle confirme également l'acceptation du grand public de ce mode de transmission digital entre le privé et le public. Pour sa part, l'application mobile MyGuichet.lu a été téléchargée à envi- ron 150.000 reprises. Parmi les démarches les plus utilisées figure la demande de rendez-vous pour le dépistage de la COVID-19, mais également la demande de casier judiciaire pour personne physique et la demande pour aide financière de l'Etat pour études supérieures. L'offre en démarches sur l'application est vouée à se développer rapidement. Depuis son lancement, le total des opérations effectuées sur l'app (démarches effectuées, consultations et téléchargements de documents) dépasse les 900.000. L'ensemble de ces résultats sont autant d'indicateurs qui confortent la volonté du ministère de continuer d'étendre l'éventail des services publics digitaux accessibles et axés sur les besoins des utilisateurs afin d'offrir aux citoyens et aux entre- prises des services publics adaptés aux défis posés par l'ère digitale. Source : ministère de la Digitalisation / Centre des technologies de l'information de l'État (CTIE) Des chiffres records pourMyGuichet.lu