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2019 LIBOR Survey: Thriving in Transition Uncertainty

In this new Accenture Finance & Risk document we present the key finding from a global study across financial services firms to assess the impact of the LIBOR transition. Visit www.accenture.com/LIBORsurvey for more information

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2019 LIBOR Survey: Thriving in Transition Uncertainty

  1. 1. 2019 LIBOR SURVEY September 2019 Thriving in transition uncertainty LIBORATION
  2. 2. Executive Summary
  3. 3. Accenture conducted an industry-wide survey across financial services firms to assess their level of readiness, their ability to transition away from LIBOR, the challenges faced and the impacts of the transition. The Challenge The replacementof LIBOR by 2021 presents significantchallenges for financial services organizations across business functions,including risk, operations and technology. As the deadline approaches firms should be ready to adapt quickly and move with the market to reduce operational, financial and reputational risk, and to limit impacts to business and infrastructure, as well as liquidity and basis risk through funding and hedging operations. Industry Perspective Accenture’s 2019 LIBOR survey interviewed 177 firms across the financial services industry, including investment banks, commercialand retail banks, asset managers, insurance companies and corporates.The emerging narrative from the survey was a mixed picture of preparedness.The 2021 deadline for when the Financial ConductAuthority (FCA) will cease requiring LIBOR banks to reportis fast approaching, and survey respondents seem under prepared with less than 20% describing their transition program as mature. Accenture Can Help Accenture has developedend-to-end capabilities to help with the assessment and execution of LIBOR transformations. Through a dedicated globalteam with the skills and experience required to provide strategic supportand a robust LIBOR ecosystem,we can deliver actionable solutions that can help any financial firm effectivelyorchestrate their transition, and transform their operating modeland infrastructure to respond to the challenges ahead. Executive Summary
  4. 4. The Challenge of the LIBOR Transition The focus on LIBOR is expected to be uneven on the transition journey to 2021 and firms should be ready to adapt quickly as market dynamics evolve. Unprepared for a Complex Transition A wait and see approach to the LIBOR transition in the hope regulators show flexibility with the 2021 deadline thus exposing firms to additional risk Industry Confliction Transitioning to a multi-rate environment challenges firms’ priorities on what they “need to know” and how to respond effectively Drivers and Passengers on the Road to 2021 Understanding the full impact of the transition is key to driving a remediation and transition program Impact Assessments Identify impacts of transition across key functions, business lines and product groups Mobilization Industrializing innovative technologies can identify, monitor and help manage the mobilization phase and replace old legacy technology Transition Transitioning with industry peers and evolving to attract the appropriate talent can reduce risk and allow integrated cross-industry testing in new multi-rate environment Where industry is placed 2019 2020 2021
  5. 5. LIBOR Survey – Results and Analysis
  6. 6. Of the 177 financial services and industry respondents interviewed, the emerging narrative is a mixed picture of preparedness for the LIBOR transition. The Emerging Narrative from 2019 LIBOR Survey Unprepared for a Complex Transition Though 84% of surveyed firms have a formal LIBOR transition plan, the level of preparedness is low with only 18% of respondents describing their plans as “mature.” While firms are aware of what they should do, they seem to underestimate the complexityof the task at hand, and approaches taken are oftensiloed and not integrated across business function. Industry Confliction and Conflicted Industry The survey highlights conflicting viewpoints regarding readiness and priorities.This indicates that respondents maylack a clear understanding of the level of granularity and focus required to address the true impact of the transition, which may lead to higher transition costs,less certainty in achieving transition goals and even adverse client and reputational impact. Is Overconfidence Increasing Risk Responsespoint to a certain level of overconfidencefor what can be describedas a very demanding and complicated transition away from LIBOR, which appears to be driven by a lack of appreciation for the practical challenges and real- world issues surrounding the transition. Survey findings, and our discussions with clients, indicate there is a lack of strategic foresight,and thinking in any sort of holistic way. Drivers and Passengers on the Path to 2021 Survey results indicate that while some respondents are choosing to actively “drive” a remediationand transition program across their organization to meet the deadline, others are taking a more passive stance. Firms across the industry should balance their responseand assess how passive or dynamic to be in their approach and spend foran orderly and timely transition.
  7. 7. Survey results indicate that total spending on LIBOR remediation varies considerably depending on industry, geography and company size. Not surprisingly, spending on LIBOR transition rises in proportion to organization size. For example, firms with assets under management (AUM) of $500 b or more spend a mean $212 m, and those with revenues of $25 b spend $235 m. Investment banks expect to spend more than any other surveyed industry with substantial representation in our survey ($121 m). The small handful of captive finance respondents expect to spend a mean of $156 m. UK-based respondents expect to spend more than those in any other geography ($128.7 m). Focus Areas 1% 2% 10% 20% 26% 24% 2% 14% 0% 5% 10% 15% 20% 25% 30% USD 400 million or more USD 300 million – 399 million USD 200 million – 299 million USD 100 million – 199 million USD 50 million – 99 million USD 20 million – 49 million USD 10 million – 19 million USD 10 million or less Source: Accenture 2019 LIBOR Survey, August 2019.
  8. 8. Survey results indicate that respondents are focusing their spending on Operational Readiness, Legal and Risk Management over the next 3 years. Spending on LIBOR transition rises in proportion to organization size. Investment banks expect to spend more than any other industry. Overall the surveyed respondents are focusing their remediation actions on Risk Management, Legal and Contractual, and Operational Readiness functions over the next 3 years. Focus Areas Risk Management Transition Program Governance Legal & Contractual Accounting & Tax Portfolio & Product Strategy Valuation & Exposure Management Clients Global & Cross Currency Cross Industry Testing Operational Readiness 2019 2020 2021 Source: Accenture 2019 LIBOR Survey, August 2019.
  9. 9. Survey results indicate that respondents are focused across Capital Markets, Banking and Insurance – with total spend across these three areas greater than $100 m. Focus Areas $44.6 million $93.5 million $124.5 million $141.7 million $- $50 $100 $150 Immature Established Strong Mature Maturity scale self-reported LIBOR program maturity level $54.4 million $106.8 million $113.4 million $117.4 million $- $20 $40 $60 $80 $100 $120 Corporates Insurance Banking Capital markets Source: Accenture 2019 LIBOR Survey, August 2019.
  10. 10. Survey results indicate that product design is favored when it comes to transition funding. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. All financial services subsectors allocate funding in a similar way—with product design taking priority and client outreach receiving the least amount of support. Though our results are directional rather than statistically significant, corporate respondents tend to allocate more funds toward operations (20% on average) than any other area. 8% 9% 13% 14% 17% 17% 23% 0% 5% 10% 15% 20% 25% Client outreach Legal remediation (excluding external counsel) Operating model (people, process, policy and function) Technology/system configuration Operations Risk models Product design
  11. 11. Survey results indicate that respondents have differing expectations from global regulators. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. Large majorities of mature organizations (more than 80% for most statements) agree with every statement here—significantly more than immature organizations. 43% of immature organizations agree that regulatory uncertainty is holding back remediation efforts, slightly more than mature organizations (38%). Respondents expecting LIBOR to discontinue before 2021 are more likely to agree with these statements.40% 45% 47% 47% 48% 48% 49% 50% 51% 53% 0% 10% 20% 30% 40% 50% 60% We feel confident that we understand the regulatory expectations across jurisdictions for an LIBOR transition Given the regulatory uncertainty we expect that our regulators will provide relief to our organization We are developing our LIBOR transition plan to consider multiple regulatory scenarios We have clear expectations and understanding of our client expectation/requirement We believe the transition away from LIBOR will lead to an increase in industry fragmentation We have a sufficient number of resources allocated/ planned to enable a LIBOR remediation initiative We feel confident that we have the necessary talent and capabilities to complete our LIBOR transition by 2021 We have established a framework to adapt to the accumulation of risk We have sufficient funding allocated/planned to enable a LIBOR remediation initiative We believe that regulatory uncertainty/lack of clarification is holding back our remediation efforts
  12. 12. Survey results indicate that a majority of respondents expect LIBOR to terminate in 2021 or earlier. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. Mortgage banking (45%) and card banking (43%) respondents are more likely than the total to think LIBOR will discontinue before 2021. 75% of respondents who describe their transition program as “mature” and 63% of those who rate their program as “strong” say LIBOR will discontinue before 2021. By contrast, no “established” or “immature” respondents have that expectation. It’s likely that organizations develop LIBOR maturity because they expect a faster transition. 23% 46% 32% 0% 10% 20% 30% 40% 50% LIBOR to gradually discontinue post 2021 LIBOR to discontinue at 2021 LIBOR to discontinue before 2021
  13. 13. Survey results indicate that respondents consider project managers to be key resources in the LIBOR transition. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. Investment banking respondents are more likely than those in other financial services subsectors to say risk management / front-office quants are important (85%). Card banking respondents are more likely than those in other financial services subsectors to say technology analysts are important (73%). 28% 15% 14% 10% 9% 7% 6% 39% 37% 35% 32% 29% 20% 15% 33% 48% 51% 58% 62% 73% 79% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Tester Business analysts Legal Technology analysts Data analysts Risk management/front-office quants Project managers Lower importance Medium importance Higher importance
  14. 14. Half of survey respondents say LIBOR represent a strategic opportunity. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. Wealth management firms (67%) are the most likely financial services subsector to agree with this statement; retail banks (54%) are least likely. 94% of “mature” organizations see LIBOR transition as a strategic opportunity, vs. 3% of “immature,” suggesting that organizations with more sophisticated transition plans have realized the value of the transition. 40% of organizations that think LIBOR will gradually discontinue after 2021 disagree with this statement. Agree,50% Neither agree nor disagree, 35% Disagree,15%
  15. 15. Most survey respondents anticipate modest gains from a new reference rate. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. 4% 32% 28% 18% 8% 6% 3% 2% 0% 5% 10% 15% 20% 25% 30% 35% Do not know 0-49 basis points 50-99 basis points 100-199 basis points 200-299 basis points 300-399 basis points 400-499 basis points 500 basis points or more
  16. 16. Survey indicates that respondents expect incremental revenue as a result of the new reference rate. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. 56 basis points 78 basis points * 98 basis points * 119 basis points * 123 basis points 125 basis points * 127 basis points 132 basis points 134 basis points 134 basis points 140 basis points * 149 basis points * 159 basis points 161 basis points * 0 20 40 60 80 100 120 140 160 Captive finance Resources Life insurance Health and life sciences Investment banking Communications, media and high tech Asset management Wealth management Corporate banking Retail banking Property and casual insurance Mortgage banking Card banking Products and services *Due to the small n-counts in this subsector, results are directional
  17. 17. Among survey respondents SOFR leads by far as an alternative reference rate. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. 23% 28% 34% 68% 85% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% EUR/ESTER CHF/SARON JPY/TONAR GBP/SONIA USD/SOFR
  18. 18. Accelerating Toward an Effective Transition
  19. 19. LIBOR Transition Impact < 2 Years Limited timing for market change-over with regulatory scrutiny. ~$155 b Unprecedentedbusiness and technologycost (estimated). Complex and Invasive Change with interdependencies across organization and industry. Costly transition Significant investment required to transition to the new regime with no guarantee of offsetting revenue. Pervasiveimpacts to businessand infrastructure Large scale changes to contracts, business and technology are required to remove LIBOR and establish amended and new products. Marketuncertainty Uncertainty around rate replacement timing and application across geographies leads to difficulty in planning. Integration Stakeholders from across firm functions and lines of business to work together to reduce the risk of siloed approaches to transition. Impacts to liquidity and basis risk Firms should understand the fundamental differences in new reference rates and analyze impact to funding and hedging. Keepingpace As market dynamics evolve, firms should adapt quickly and be ready to move with the market to reduce operational and financial risk. SIX KEY CONCERNS LIBOR reform presents a set of unique concerns
  20. 20. Steps for LIBOR Transition As financial firms plan their transition they should assess and prioritize the key decisions to be made. 2.1 Transition Strategy Define an Integrated LIBOR Transition Strategy to capture productchanges, client outreach, contract remediation,and impacts to pricing and modeling. 3.2 InfrastructureChanges to Ops & Technology Implementand test systems to support new products,contracts,disclosures,risk management, operations and technologyto operate in a post- LIBOR environment. 01. ImpactAssessmentand LIBOR Program Structure Impactassessmentconducted across the firm considering all interdependencies. LIBOR program launched and key functions and stakeholders identified. 2.2 Detailed BusinessChanges Outline details of productand operating model changes, define how business is to be conducted in the new rate environment and mitigate the impact of LIBOR replacement. 3.1 Transition Execution Transition clients and contracts to new reference rates and maintain operational readiness across the firm while accounting for infrastructure changes. 01. Impact Assessment and LIBOR Program Structure 2.2 Detailed Business Changes 2.1 Transition Strategy 3.1 Transition Execution 3.2 Infrastructure Changes to Ops and Technology
  21. 21. 10 No Regret Immediate Actions Due to future regulatory uncertainties and compressed timeline for change, financial services firms should consider “no regret” actions to be prepared for change. Mobilize Program Mobilize transition program with dedicated staff, appoint senior sponsors, and program leads. Impact Assessment Start top-down analysis to identify and quantify risk, impacts and changes across products, contracts, processes, and technology. Baseline Scenario Develop baseline scenario for transition covering financials, risk, contracts and infrastructure. Transition Strategy Develop a transition plan and front to back product and technology strategy against regulatory timelines, milestones and scenario assumptions. 01 02 03 04 LIBOR Governance Identify key stakeholders and develop strong governance and accountability model to escalate decision making. Plan and Budget Create the change plans and budget to prepare for LIBOR transition activities. Communications Strategy Define internal and external communications plan and a client outreach strategy for the transition. Digitize Contracts Digitize contracts, extract data required, analyze fall backs and create a central contract database for LIBOR contracts. 05 06 07 08 Risk Management Develop risk management plan to mitigate exposure to operational, liquidity and basis risks through transition. Product and Portfolio Strategy Begin developing new or amended products and portfolio strategy referencing new risk-free rate. 09 10
  22. 22. Emerging View on Technology
  23. 23. Many vendor solutions revolve around agile turn around and R&D through small structured teams. Varied release timelines to support enhanced T+1 rates and daily compounding have a potential impact on liquidity across firms using different platforms. Emerging View on Technology Many vendors support the LIBOR transition from Main Office locations and R&D with dedicated teams. In general, customized solutions to accommodate for the LIBOR transition are not being considered. Trade Capture Platforms do not see the LIBOR transition as an opportunity for firms to replace legacy systems while data, document and risk vendors do. On average, Trade Capture Platforms were more confident in their LIBOR transition solutions than Data or Risk vendors. The majority of vendors provide functionality- specific training to clients that upgrade. The majority of vendors do not require firms to upgrade to new modules to transition from LIBOR, but instead to deploy via patch.
  24. 24. Survey results indicate technology solutions are in alignment with industry perspective and focusing greater resource investment in front office quants and data analysts. Focus Areas Vendor solutions that have a stronger front office perspective seem to have a stronger interest in investing in quants, risk managers, financials engineers, and business analysts. Vendor solutions with a less developed front office market perspective are more focused on project managers and testers. Risk Management/Front Office Quants Business Analysts Data Analysts Project Management Testers Technology Analysts/Developers Legal Specialists (SME) Mature Established Developing Source: Accenture 2019 LIBOR Survey, August 2019.
  25. 25. Emerging View on Technology Trading Platform Technology Document Management Solutions Risk Analytics Platform Data Research Solutions Direct support or subcontractor model Direct Support Direct Support Both Direct Support Direct Support Dedicated team ✓ ✓ ✓ ✓ Functionality to assist banks with LIBOR replacement ✓ ✓ ✓ ✓ ✓ Functionality catered to trigger events (end of LIBOR) ✓ ✓ ✓ ✓ Multi-rate scenario for financial products ✓ ✓ ✓ ✓ Educational materials and trainings for clients ✓ ✓ ✓ ✓ 2019 2020 2021 Trading Platform A Risk Analytics Platform Trading Platform B Document Management Solutions Trading Platform C Data Research
  26. 26. Emerging View on Technology TradingPlatform Technology DocumentManagement Solutions Risk Analytics Platform Data Research Solutions Average size of team for LIBOR transition support < 500 < 500 < 500 20K – 50K Directsupportvs. subcontractor Direct Both Direct Direct LIBOR dedicated team Yes Yes No Yes Software update process Patch Licensed Patch Patch Key functionality for clients Operations / Events Processing Analytics and Reporting Legal New Risk Models Analytics and Reporting New Risk Models Data Archiving Analytics and Reporting
  27. 27. Primary Trading Systems (PTS) to extend well beyond just pricing and deal capture functionality and provide analytical solutions for transition events. Benefits of Enhanced LIBOR Trading Platforms Emerging View on Technology Effective new rate / product pricing to allow front office to properlymanage opportunities on productP&L transition. Enhanced and established pricing / and risk management models allow for issuance / transitions in new rate products and to address postrate transition business objectives. Real-time review of portfolio allows analysis of each event in terms of Risk and P&L. Reduced collateral/ counterparty credit risk (CCR) evaluation risk. Reduced margining and hedging risk. Reduced operationalrisk. Transition EventSolutions • Functionality to perform transition betweenOLD indices and risk-free rates (RFR) for cleared and non- cleared Enhanced LIBOR Platform Solutions Analytics Reporting • Profit and Loss (P&L)and DV01 Reports • RiskAnalytics • Hedge Accounting Computational Solutions • T+1 rate fixings • Rate Look Back / lock out periods • Simple and Average Accrual calculations • Value Adjustment Spreads Prepackage Solutions • Preferred Practice Automated Solutions • Preconfigured Risk and Curve Packages • Risk Management Scenarios Ability to manage P&L impactof rate transition on products 01 02 03 Faster Go-To-Market (GTM)with new product/ rate offerings templates Reduced Enterprise Risk through Transition Analytics
  28. 28. Survey respondents think that the LIBOR transition provides an opportunity to implement new systems and replace internal legacy systems that may be too onerous to update to meet regulatory requirements. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. Smaller organizations (less than $100 b in AUM) are less likely than respondents overall to agree (38% vs. 48%), likely because updating legacy systems is not a huge issue for them. In contrast, 59% of the largest organizations agree with this statement. 97% of organizations with “mature” LIBOR transitions agree, vs. just 2% of “immature” respondents. Agree, 48% Neither agree nor disagree, 35% Disagree, 17%
  29. 29. Survey results indicate that many organizations are looking to replace booking and trading systems to upgrade technology. Focus Areas Source: Accenture 2019 LIBOR Survey, August 2019. 61% of “mature” organizations say they expect to replace booking / trading systems (vs. 51% total); 58% to replace liquidity management systems (vs. 48% total). Retail banks (61%) and corporate banking respondents (60%) are more likely than the total (51%) to replace their booking / trading systems). 7% 20% 28% 29% 45% 48% 51% 54% 0% 10% 20% 30% 40% 50% 60% Data warehouses/lakes Market data providers Legal systems Pricing/modelling systems Settlement/operational systems Liquidity management and hedging Booking/trading systems Risk systems
  30. 30. Appendix
  31. 31. Thriving in Transition Uncertainty The transition away from the LIBOR benchmark rate is expected to be very demanding and complicated. In response, Accenture commissioned a survey to gauge financial services firms’ level of readiness, their ability to transition away from LIBOR, the challenges faced and the impacts. Download the survey findings now or contact us to find out more. www.accenture.com/LIBORsurvey Liboration
  32. 32. Thank you Contact us SamanthaRegan Managing Director Accenture Financial Services Accenture Finance & Risk Accenture Regulatory & Compliance Lead samantha.regan@accenture.com SharonBiran Managing Director Accenture Financial Services sharon.r.biran@accenture.com Venetia Woo Director– Accenture Financial Services Accenture Finance & Risk NA Regulatory Strategy Lead venetia.w.woo@accenture.com Lisa Bloomberg Director– Accenture Financial Services Accenture Finance & Risk NA Regulatory & Compliance LegalLead lisa.bloomberg@accenture.com Peter Beardshaw Managing Director Accenture Financial Services Accenture Finance & Risk UKI Finance & Risk Lead peter.beardshaw@accenture.com Maria Soutemenoglou Managing Director Accenture Financial Services UKI Capital Markets LIBOR Lead maria.soutemenoglou@accenture.com Usman Raj Senior Manager Accenture Financial Services Accenture Finance & Risk usman.raj@accenture.com Eva Maybud Managing Director Accenture Financial Services Accenture Finance & Risk ASG Treasury & Capital Markets Lead eva.maybud@accenture.com Aida Rodriguez Moral Senior Manager Accenture Financial Services Accenture Finance & Risk Iberia LIBOR Lead aida.rodriguez.moral@accenture.com
  33. 33. Thank you Accenture2019 LIBORSurvey https://www.accenture.com/LIBORsurvey To find out more https://www.linkedin.com/showcase/16183502 https://twitter.com/AccentureFSRisk AccentureFinance& Risk Blogs https://financeandriskblog.accenture.com AccentureFinance& Risk https://www.accenture.com/financeandrisk
  34. 34. Thriving in Transition Uncertainty About Accenture Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network —Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 482,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com Liboration Disclaimer This presentation is intended for general informational purposes only and does not take into account the reader’s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this presentation and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals.