Duff & Phelps, A Kroll Business, the world’s premier provider of governance, risk and transparency solutions, today publishes research revealing 77% of financial institutions do not have a comprehensive plan in place for LIBOR transition, which is due to take place on 31 December 2021.
Over half of the firms (54%) surveyed identified LIBOR exposures, but have not yet taken necessary action to resolve their liability. Of that 54%, 58% had not catalogued transition provision, and 42% were unsure of what to do next. Almost a quarter (23%) of the firms surveyed have not begun any formal processes to identify exposure.
Failure to adequately prepare for the LIBOR transition could lead to significant risks for firms as contracts transition to alternative reference rates. As such, there is potential for the underlying value to shift from one party to another.
When asked whether financial institutions are on track for the transition, a third of respondents (34%) revealed a belief that they are on track, despite the stunted progress across the majority of the industry. However, there is a fear that this could indicate that firms are underestimating the extent and complexity of work required for a successful transition.
Worryingly, a similar number of firms (31%) have only just begun thinking about their transition and are unsure whether they are on track. Fourteen percent of respondents have not begun planning, with a further 14% concerned they will not be ready before at least Q1 2022, three months after the cessation date. Only 7% of firms predict they will be ready by the end of H1 2021, well in advance of the deadline.
Jennifer Press, Managing Director, Alternative Asset Advisory Services at Duff & Phelps, said:
“The LIBOR transition is one of the greatest regulatory-driven changes ever, and inevitably it requires complex planning, thought and analysis. It’s therefore quite surprising to see that just nine months away from the hard deadline, the majority of financial institutions who were polled do not have a comprehensive plan in place.
Marcus Morton, Managing Director, Valuation Services at Duff & Phelps, said:
“The results indicate that although the majority of firms have identified their LIBOR exposures, many have yet to formally catalogue the transition provisions. There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate. It will pay in the long term to properly assess exposure of each and every contract, even if firms are under the impression fallback language is sufficient.
Rich Vestuto, Managing Director, Legal Management Consulting Services at Duff & Phelps, said:
“Employing technologies such as natural language processing and AI to analyse, interpret and extract relevant clauses and LIBOR-influenced language on target contracts could go a long way to help firms fully understand their exposure, but they must start the process now.”
Background:
The survey was conducted on 23 March 2021 at Duff & Phelps’ webinar ‘LIBOR Transition: Everyone needs to be ready. Are you?’. The data was gathered from a sample of 27 respondents, comprised private equity firms (43%), professional service providers (25%), hedge funds (11%), banks (4%) and others (18%).
