Insurers on track with plans to migrate from IBOR-linked benchmark rates to alternative reference rates

Written by Adam Cadle

23/09/2020

The majority of global banks, asset managers, and insurers have said they are on track with their plans to migrate from IBOR-linked benchmark rates to alternative reference rates at the end of 2021, despite the disruption caused by the coronavirus pandemic, according to a survey by Moody's Investors Service.

Moody's surveyed 85 global banks and non-bank financial institutions (NBFIs) to gauge their preparedness for the phasing out of the IBOR benchmark. All of the financial institutions Moody's surveyed this year said they now have transition plans in place, compared with a year ago when only around two-thirds of banks, and one-third of non-bank financial institutions had plans. The majority of those surveyed said that COVID-19 disruption would not delay the IBOR phase-out and only affect interim milestones.

"Respondents highlighted that robust communications with stakeholders will be crucial for the transition and most banks have reached out to affected customers," Olivier Panis, vice president – senior credit officer at Moody's Investors Service said. "Most institutions we surveyed still expect transition costs to be split between lenders and borrowers."

Financial institutions have only 15 months left to migrate from IBOR-linked rates to alternative reference rates, as the global benchmark is phased-out.

Around 60% of banks surveyed said they had already issued floating-rate debt indexed to alternative reference rates (ARR's), as well as increased their exposure to both ARR-indexed derivatives and the SONIA benchmark, unlike NBFIs whose exposure to alternative benchmarks has remained limited. The absolute exposure of financial institutions to IBOR-linked contracts which should be transitioned by the end of 2021 remains substantial although some "tough legacy exposure" will require bespoke solutions.

Among, the key transition challenges that financial institutions face are insufficient liquidity in ARR, implementing fallback provisions and updating systems and models.

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