LIBOR Replacement Project Update
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The saga continues. As various deadlines approach, and in some cases are delayed, the debates and uncertainty continue over what benchmarks will replace the various LIBOR benchmarks.
We had a lively discussion – but the consensus was that, while this is a significant nuisance factor for treasurers, the issue will not threaten the existence of the companies of any of our participants.
The main concerns relate to tax and intercompany loans: with LIBOR, there was a benchmark which could be used and accepted by tax authorities, and which worked for many currencies. The concern is that the new benchmarks are different for each currency, and often need to be adjusted for risk factors – again these vary. This raises the concern over possible challenges by tax authorities on interest rates used.
Solutions include using fixed rate loans or using the IBOR type rates which will continue to be published, such as EURIBOR, or USD LIBOR, which will be around for some maturities, at least until mid 2023.
External funding is less of a concern, as few treasurers regularly using floating rate external funds. Where needed, most have found it possible to sign new agreements saying LIBOR will be used as long as it is published, and then moved to the replacement rate, which is SOFR for the USD. Of course, this also delays resolving the issue on the adder to SOFR – but most people seem to be able to live with that.
The other significant concern is updating treasury management systems to handle the new rates. This is not expected to be a major technical issue – but it cannot be done until we have full clarity on the new rates.
Some participants expressed concern about the ability to provide accurate accounting valuations for hedges and swaps – again, no-one is expecting material accounting misstatements, but there may well be some unwelcome I&E volatility.
Bottom line: while it is easy to criticise regulators, this does seem to be a case where the approach has been “Ready! Fire! Aim!”. Interest rate benchmarks are proving to be a more complex problem to solve than most people anticipated – it is not possible to do justice in this summary to the issues raised. For treasurers, this is not a matter of life or death – but it is proving to be an unwelcome – and probably unnecessary – distraction
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