LIBOR Transition with Ease: Managing the Move to Risk-Free Rates

As the market transitions from benchmark interest rates, such as Interbank Offered Rates (IBORs), towards alternative Risk-Free Rates (RFRs), we have been working hard to deliver industry-leading RFR solutions to help our clients manage this change which is now less than 12 months away.

Given the looming deadline, we thought it was a good time to catch up with Robert Moeller, head of product for our RFR solutions, to find out about the latest updates we've made to our Wall Street Office (WSO) solution, and with Christel Heckmann, Global Head of Loan Capital Markets at Danske Bank A/S, to hear how preparations are going.

Q: Robert, what is the biggest challenge when it comes to transitioning to RFRs and how are we addressing it in our new solution?

The transition to RFRs represents a significant change in the calculation of interest, from simple interest with fixed term rates to compounding interest with daily rate changes. Our RFR solution for Wall Street Office (WSO) introduces a new Rate Option Behavior and Interest Methods. The new behavior will allow the application to utilize a source agnostic Calculation Engine hosted in an Amazon Web Services (AWS) cloud environment to calculate interest, giving users instant transparency and confidence in their daily accruals.

Q: Robert, will existing WSO customers still have access to the same functionality in this new version of the solution?

Absolutely. WSO's highly customizable features from trade capture, asset and deal administration to reconciliation, reporting, compliance and accounting have all been enhanced with new RFR functionality, guaranteeing users the smoothest RFR transition without disruption to critical processes and services.

Q: Christel, how is Danske Bank managing the change towards RFRs?

Agility in implementation of designed solutions for RFRs, close cooperation among various financial product experts and timely communication with stakeholders are the keywords in being able to tackle the challenges that LIBOR transition presents to all affected parties.

Danske Bank A/S acknowledges that the LIBOR reform will raise many questions and it is difficult to provide an exhaustive list of considerations. The WSO solution for loans helps tremendously to minimize manual work and move to more streamlined and automated processes.

Q: Robert, what are we doing to support clients' reporting needs for the IBOR transition?

We've added a number of reporting options that allow users to track RFR accrued and earned income, as well as RFR and IBOR exposure in their holdings. Our WSO Administrator user interface updates include the ability to quickly and easily review the daily accruals on each position as well as review RFR asset details for each loan held. HTML5 Activity Memos also display daily interest accruals with sections for contract spread and base rate accruals.

Q: Robert, does the RFR solution meet the Alternative Reference Rates Committee (ARRC) guidelines?

We've been working to make these changes to WSO over the past year and have been focused on ensuring these efforts meet the ARRC vendor preparedness guidelines for technology and operations. We are also part of a number of RFR tools and data sources aimed at helping clients understand the value impact on the transition.

Q: Christel, IHS Markit also offers afree RFR Calculator to help firms with detailed compounding and simple interest calculations for SOFR, SONIA, ESTR, TONAR, SORA, and SARON. How is it helping Danske Bank A/S to address this significant industry transition?

The forthcoming transition from LIBOR to RFRs is a significant challenge for banks and lenders from an operational risk perspective, as the legacy systems are not designed to support the new replacement benchmarks. Calculation of a compounded rate or simple daily RFR can be complex and the key objective of the RFR Calculator is to help one understand the impact of various market conventions and methodologies that are still under discussion across financial markets.

The IHS Markit RFR Calculator is not only a great educational tool on the new methodologies and conventions applicable to RFRs, but it also has all the vital features that the syndicated loan market systems depend on, such as flexibility, consistency and accuracy.

Q: Robert, how does our RFR Calculator compare to other calculators on the market?

The Bank of England and the Sterling RFR Working Group recently released their independent review of publicly available calculators. The review highlights our strong capabilities compared to the competition as we continue to add new functionality which, in the past few months, has included simple in arrears methodologies, floors, spread adjustment and lockout. To read the full review click here.

Q: And finally, Robert, if clients want to upgrade to the latest version of WSO to manage the transition to RFRs, what do they need to do?

Our RFR Calculator is available freely online through the following link. In order to upgrade to the latest version of WSO, clients should get in touch with their client manager as soon as possible to discuss the migration in more detail. Although the transition is a year away, clients really need to start getting prepared now if they are going to meet the deadline.

Learn more about the LIBOR transition

Posted 28 January 2021 by Robert Moeller, Executive Director, Commercial Strategy for Credit Software Solutions, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.