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Constandinos Vinall
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2nd Annual
Benchmark Rate Reform for Treasury and Accounting
What changes are likely to occur in the fair value of financial instruments as a result of the move away from LIBOR?
IBOR has been defined as the most important number in the financial context. Definitely there is a key impact on the financial reporting under IFRS. RFRs are a key input in the fair value measurement and present values of derivative, debt, mortgages, pensions, and investment property.
What associated risks are likely to come as a result of these changes?
The transition to ARFRs and the development of fall-back methodologies may impact the value of legacy contracts, with implications for value transfer between counterparties.
A key of focus is the technology systems, as it is important they can incorporate new ARRs with features that differ from LIBOR. Basis risk resulting from varying fallback language, ineffective Hedge, model risk, continued origination of new IBOR-linked contracts maturing post-2021 and conduct risk are other areas financial institutions should analyse carefully.
What are the potential effects on pricing and FTP?
As mentioned in the previous points, the impacts on the operational model will be high given the dual-rate environment during the transition when IBORs and ARRs are expected to co-exist. Common pain points include funds transfer pricing (FTP) and Hedge Accounting, Asset Liability Management, risk models and client communications strategy.
Which measures can banks take to help manage and mitigate the effects of the changes in fair value?
Financial institutions can perform an impact assessment across legal contracts, systems, processes and risk and valuation models to develop a contingency plan for legacy transactions maturing after 2021 in the event of LIBOR discontinuation. Other areas where risk can be mitigated are fall back language and conduct risk through active engagement with legal and clients; basis risk through identification and assessment of the contracts subject to risk of hedge mismatch to their customers when adopting new fall back language. Finally it is crucial to define robust controls to prevent any potential conflicts of interest within the organisation.
What would you like to achieve by attending the Benchmark Rate Reform for Treasury and Accounting event?
Share market practice and approach in the management of the IBOR transition.
Maurizio Garro
Senior Lead - IBOR Transition programme
Lloyds Banking Group
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Ahead of the 2nd Annual Benchmark Rate Reform for Treasury and Accounting conference, we spoke with Maurizio Garro from Lloyds Banking Group
About the Conference
This marcus evans conference will investigate the impact of the transition to risk free rates on the fair value of financial instruments and P&L volatility.
As LIBOR’s demise draws closer, more strain will be placed on financial instruments to move to the newer rates. This shift will introduce changes in the fair value of these instruments and threaten the hedging relationships they are attached to. As time goes on, the threat of ineffective hedging increases, with the associated dangers of de-designation, and the need to potentially unwind certain hedges. Whilst the IASB have released their phase 1 relief and tackled many of these issues, the work is far from over – with further effort needed to manage the transition and period preceding it. It will be crucial that the impact on balance sheets and hedge accounting is foreseen and work is done to mitigate potential issues. With P&L volatility, basis risk, and broken or ineffective hedge relationships looming, institutions must work now to effectively navigate the transition to the backdrop of regulatory guidance.
Maurizio Garro works as a Model SME Lead for the IBOR Transition programme at Lloyds Banking Group, where he is leading the delivery of the changes required for models, curves and products for the transition to the alternative risk-free rates for the Front and Back book. His background is in Model Risk, Market Risk, Counterparty Credit Risk, Pricing, Liquidity and Stress Testing.
He has a long-standing experience as an internal auditor, consultant and banker in model risk management and previously worked in the Development and Validation teams of top-tier financial institutions in Europe, U.S., and the U.K. for over 15 years.
Maurizio is a frequent speaker on various topics in risk management, a member of the Institute of Internal Auditor and the Director of the Global Association of Risk Professional (GARP) London Chapter.
Maurizio Garro received his Master Degree in Economics from the Bocconi University of Milano and a certificate in Financial Risk Management (FRM) from GARP
More Information
To View the Conference Agenda, click HERE!
To view the Conference Agenda, click HERE!
