The investment services industry has a critical amount of work ahead of them to manage and reduce transition risks. Given the size and risk of the work, the industry needs to urgently initiate a roadmap to transition and start work on those areas that can be addressed immediately.
There are three primary uses that the investment management industry has for the existing benchmark rates, each of which will need to be carefully managed through the transition.
Investment managers hold IBOR-based products in their portfolios, particularly derivatives for hedging. Many corporations also hold IBOR-based floating rate notes, securitisations, or private debt. Transition of the investment portfolio will need to be carefully overseen to ensure no client value is lost.
Benchmark usage for funds and mandates
Investment managers use IBORs as a benchmark or performance target for their funds or mandates, particularly in Fixed Income, Alternative, Allocation, and Money Market strategies. Even benchmarks that do not directly reference a benchmark rate may reference indices based on a benchmark. The benchmarks and targets will need to be transitioned while avoiding the appearance that measured performance has been inflated.
Operational and administrative models
A wide range of systems, models, and calculations use IBOR-based curves as an interest rate benchmark, such as valuation curves for accounting purposes, risk measurement, and pricing and asset allocation models. Contracts with service providers and infrastructure may also use a benchmark rate, whilst a rate is often mandated by technical standards of regulations. Many risk, pricing, and valuation models will therefore need to be updated.