LIBOR and Conduct Risk: When and How Should You Mitigate?

Don’t get left in the
dark when LIBOR is
switched off
LIBOR and
Conduct Risk

CONDUCT RISK ASSOCIATED WITH LIBOR TRANSITION
THE IMPORTANCE OF ADDRESSING CONDUCT RISKS
Copyright © 2020 Accenture. All rights reserved. 2
Conduct risk is particularly relevant to the LIBOR transition as customer perceptions are that the new alternative
reference rate (ARR) products and options are not economically equivalent, creating commercial “winners and losers.”
The way firms handle client engagement, communication, and understanding can amplify conduct risk.
Defining Conduct Risk
Ethics, conduct and culture are the foundation of success, serve as the basis for a firm’s reputation
and license to operate. Though conduct risk has been a regulatory priority since the global financial
crisis; there is no formal unified conduct risk regime in the U.S.
Broadly, leading firms consider conduct risk to be an action that could lead to:
(a) poor outcomes for clients, or
(b) behaviors that prevent, restrict or distort effective competition, or
(c) have an adverse effect on market integrity, or
(d) extends beyond the U.S. rules for sales and suitability, UDAAP, and fair disclosure, etc.
Conduct Risk in LIBOR Transition
The roster of U.S. regulators raising preparedness for LIBOR transition continues to grow with the
SEC and FINRA joining the ranks of the OCC, the CFTC, and the NYDFS.
Key risks related to IBOR transition include:
- Misleading clients through client communications regarding the ongoing suitability of IBORs
- Negative client outcomes and conflicts of interest driven by the economic inequivalence of
IBORs and the ARRs
- Anti-competitive practices in RFR or industry working groups
- Market abuse, mis-selling and unfair and deceptive practices seeking unfair advantage as a
result of the transition
- Costly litigation resulting from consumer harm incurred in the transition
Change
Required to
Fallback
Provisions
Complexity
of New
ARRs
Environment
Client
Maturity &
Awareness
Product
Complexity
Product
Maturity
IBOR Conduct
Risk Drivers
Regulators in the U.S., the UK, and the European Union have fined banks
more than $9 billion for misconduct related to LIBOR and will expect a
focus on good conduct throughout the transition to ARRs.
Please see Legend for acronyms
Source: https://www.cfr.org/backgrounder/understanding-libor-scandal

Key Conduct Risk Drivers
Trade entry/product maturity
• Trade entry dates are key in the context of Benchmarks Regulation (BMR)
and its requirements for robust fallback plans.
• Maturity dates are also important given the target transition date of 2021
set out by regulators.
Product complexity
• The broad scope of products impacted by the transition implies an equally
broad spectrum of complexity.
• Complexity drives conduct risk, particularly complex exotic products, which
may include direct and indirect reference to IBOR rates and inherent
complexities in fallback provisions.
Client sophistication/awareness
• The broad spectrum of products implies a broad spectrum of impacted
clients and counterparties.
• The protection afforded to clients against misconduct should be
proportional to their sophistication.
CONDUCT RISK DRIVERS
Productcomplexity
Throughout the transition, conduct risk is expected to result from a number of key drivers which should be mitigated
through a robust conduct risk framework with targeted management information (MI) that evidences how firms are
discharging their duties.
These drivers are key considerations in creating and embedding a robust conduct
risk framework and risk mitigation methodology with associated MI

CONDUCT RISK EXPECTATIONS
What is expected
→ Demonstrate that a fair price has been established at
the moment of signature and that this is fairly applied
across like client groups
→ Analyze risk of misconduct occurences and
appropriately plan and manage mitigation
→ Document and demonstrate
→ Control framework and governance (1st, 2nd, 3rd LoD)
surveillance for mitigation
→ Qualify, quantify, and report on conduct risk and
underlying exposure
Reg BI
UDAAP
CFPB
FINRA
Conduct
Rules
Operate within current regulatory
frameworks followed today (UDAAP,
Sales and Suitability) to include LIBOR
specifics
Include conduct
related activities that
are not covered by
existing frameworks
(e.g., transactions)
Although current focus is on LIBOR transition execution, firms should plan ahead to generate evidence demonstrating
their fiduciary duties are fulfilled.

• Engage with clients through all communication channels
(i.e., verbal, written, social media)
• Document contract discovery and assessment criteria
• Detail impact analysis and decisioning factors
ACT IN THE CLIENT BEST INTEREST PROVIDE TRANSPARENCY AND
EFFECTIVE COMMUNICATION
OVERSIGHT AND
SUPPORT
• Review of client outreach
• Assess fairness against original
impact analysis
• Complaint management
• Evidence client outreach (verbal and written) at key moments
• Document rate and fairness decisions
• Consistent and detailed marketing and client communications
• Conduct risk MI to identify at risk counterparties and product
prioritization
MitigantsAction
MITIGATING CONDUCT RISK
There are key moments when banks should demonstrate they are acting in their clients’ best interests, providing
transparency and effectively communicating to mitigate potential misconduct.
Discovery
Identify all in-
scope contracts
impacted
Digitize
Digitize and
Store
Digitize, store, and
extract key metadata
from contracts in a
secure environment
so they are accessible
to relevant
stakeholders
Rebook
Contracts
Signature
Closure
Review
Client
Feedback
Update contracts
to contain newly
agreed upon
fallback language
Negotiation
Discuss and agree
on remediation
action
Client
Outreach
Implement client
strategy for
communications,
disclosures, and
marketing
materials
Create Contract
Amendment
Selection of appropriate
fallback language / new
contract terms for
amendment
Data
Client /
Portfolio
Assessment
Front office review
client and portfolio
impacts
Finance &
Risk Review
Review for impact
on risk and financial
measures
1
2
3
4
5
6
7
8
9
10
11 12
13
PHASE 1 – STRATEGIC PLANNING PHASE 2 – IMPLEMENTATION
PHASE 3 – POST
IMPLEMENTATION

3 LINES OF CONDUCT RISK DEFENSE
A three-layered defense with defined roles, responsibilities and authorities to permit comprehensive risk
identification and assessment as well as effective risk management supports conduct risk mitigation. Illustrative
activities within the lines of defense include:
1st Line Of Defense 2nd Line Of Defense 3rd Line Of Defense
Internal audit performs an independent, objective
and critical assessment of the design and
effectiveness of the governance framework and
overall system of controls including 2nd line of
defense functions including:
• Risk governance framework design and
implementation
• Business process changes
• Technology and data governance
• Compliance and risk management monitoring
Operational units identify and manage LIBOR risk
through predefined policy, controls, and regular
monitoring for the functions of the business.
• Document contract discovery and assessment
• Develop consistent and centralized client
engagement and communication models
• Assess model pricing and detail impact analysis and
decisioning factors
• Conduct and evidence client outreach
Compliance and Risk develop, implement, and
maintain LIBOR risk frameworks and objectively
challenge execution of risk and compliance strategies,
approaches and related management information.
• Check analysis documentation, client engagement,
reporting
• Independent model governance and communication
surveillance
• Develop MI to track and report corporate exposures
to LIBOR risk, leveraging MI
Communication, Collaboration, Reliance
Integrated Reporting
Board of Directors/
Senior Management
• Perform oversight and require client best interests to be central to transition decisions
• Establish risk appetite for ARR selection, impact, and strategy
• Approve the risk management framework for the transition program

MONITORING CONDUCT RISK WITH MI
Conduct risk MI plays an important role in helping firms identify, track, mitigate and evidence their conduct risk related
to IBOR transition.
Reduces the risk of customer detriment
Satisfies regulatory requirements and expectations
Demonstrates that appropriate and proportionate action is being taken to mitigate conduct
risk to management and supervisors
Creates cross-applicable data that permits efficient planning and prioritization
Streamlines program reporting which can be used to evidence mitigation efforts

KEY ACTIVITIES FOR GREATER EFFECTIVENESS
Client Communication and
Outreach
• Start the client communication plan by defining the
timing and nature of communication even if
alternatives rates are not yet known
• Define communication script for Relationship
Managers to engage discussion with key clients
• Define the client outreach strategy by type of product
and client / counterparty. Start the mobilization plan to
anticipate the increasing outreach demand
Contract Language and
Fallback Adequacy
• Identifying legal and contractual impacts, developing
a strategy for remediation, assessing readiness to
implement more robust fallback language into
contracts, and creating both a negotiation strategy
and supporting processes
• Understand impact from penalty rates and clauses in
legacy backbook
• Define operational readiness strategy based on the
target dates when the steady state is anticipated
• Translate the steady state into key objectives
(product, contract, operations, platforms, etc.) and
align LIBOR plan to meet objectives
• Execute the chance management and training activity
for readiness
• Define dynamic pricing strategy by LoB/Product to
balance competitive market positions with centralized
fairness
• Continue to track and remediate misconduct that
should arise from IBOR products/contracts
negotiation
• Credit syndications to invoke multitudes of dates and
subscriber tracking
Monitoring
Approach and Roadmap to 2022Price Discovery and
Demonstration of Fairness
• Set up a central governance and a process that can
help the various stakeholders from the LoB to set up
new prices
• Define guidelines and fairness principle checklist that
can help to capture rate decision making and fairness
• Manage duration and term mismatch from Treasury +
Market Risk operations
• Document and centralize evidences
Provides Alternatives
• Provide alternatives rates or alternative products and
not just rely on fallback terms. Describe and provide
justification for every rate conversion
• Provide consistent options for alternative rate
structures, outreach models and messages are
provided to clients to manage potential perceptions
due to value transfer

FIVE THINGS TO GET “RIGHT”
Start communication early with clients
Take a 360 view of the client, to balance the desired
outcome for the relationship with the individual products
Keep things consistent
Align communications internally and externally
Keep good records and provide adequate controls
and data

BAU: Business as Usual
CFPB: Consumer Financial Protection Bureau
CFTC: Commodity Futures Trading Commission
FCA: Financial Conduct Authority
FINRA: Financial Industry Regulatory Authority
IBOR: Interbank Offered Rate
LIBOR: London Interbank Offered Rate
LoD: Lines of Defense
NYDFS: New York Department of Financial Services
OCC: Office of the Comptroller of the Currency
OTC: Over the Counter
PRA: Prudential Regulation Authority
Regulation BI: Regulation Best Interest
RFR: Risk-Free Rate
SEC: U.S. Securities and Exchange Commission
UDDAP: Unfair or Deceptive Acts or Practices
10Copyright © 2020 Accenture. All rights reserved.
LEGEND

www.linkedin.com/showcase/16183502
@AccentureFSRisk
Copyright © 2020 Accenture. All rights reserved.
TO FIND OUT MORE
Samantha Regan
Managing Director, Finance & Risk,
Accenture Regulatory & Compliance Lead
samantha.regan@accenture.com
Venetia Woo
Director, Finance & Risk
NA Regulatory Strategy Lead
venetia.w.woo@accenture.com
Accenture LIBOR Transition Offering:
https://www.accenture.com/us-en/services/financial-services/libor
Accenture Finance & Risk:
https://www.accenture.com/us-en/financial-services-finance-risk
Accenture Finance & Risk LIBOR Blogs:
https://financeandriskblog.accenture.com/tag/libor
Accenture LIBOR Survey:
https://www.accenture.com/us-en/insights/financial-services/libor-
transition-survey
Joel Kennedy
Director, Finance & Risk
UK LIBOR Conduct Risk
joel.kennedy@accenture.com

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.
About Accenture
Accenture is a leading global professional services
company, providing a broad range of services in
strategy and consulting, interactive, technology and
operations, with digital capabilities across all of
these services. We combine unmatched
experience and specialized capabilities across
more than 40 industries – powered by the world’s
largest network of Advanced Technology and
Intelligent Operations centers. With 509,000 people
serving clients in more than 120 countries,
Accenture brings continuous innovation to help
clients improve their performance and create
lasting value across their enterprises. Visit us at
www.accenture.com
DON’T GET LEFT IN THE DARK WHEN
LIBOR IS SWITCHED OFF
LIBOR AND CONDUCT RISK

Illustrative post-2021 origination
DEEP-DIVE: PRODUCTS AND CONDUCT RISK
Complexity and Discretion
Typically, the more complex the product and the more
discretion in the selection of an ARR the higher the
potential for conduct risk:
- Exotic derivatives which reference multiple ARRs (i.e.
multiple jurisdictions) bring greater inherent
complexity
- Products with a high number of counterparties such
as syndicated loans require coordinated negotiation
- Products with a degree of retail exposure present
higher levels of conduct risk
Timing
As products expire, are renewed, or are created, their
respective conduct risk levels vary
- Products set to expire before end-2021 may not
perform as expected due to decreased liquidity (low-
med risk)
- Products that extend beyond end-2021 or which are
renewed, require communication, negotiation, and
are subject to multiple economic factors (high risk)
- Products originated post-2021 should follow a
documented systematic approach to reduce conduct
risk, but require communication and acknowledgment
of understanding (low-med risk)
Product Impact Matrix
Timing
H
M
L
L M H
Complexity and Discretion
ETDs
Short-term
Funding
Securitised
Products
Bonds
Loans
OTC
Derivatives
(ISDA)
Syndicated
Loans
OTC
Derivatives
(NON-
ISDA)
Retail
Loans
Pensions
Product Creation
Confirm rationale for
decision:
• Evidence analysis
• Document sign-off
Confirm what would
change this decision:
• Document change
paraments
• Evidence
communication
Log transition trigger
event and monitor
continuously
Select ARR and
fallback terms
Beyond the mechanics of the instrument, Firms should consider direct and indirect conduct risk resulting from product
transitions.

• Apply FINRA’s Reg BI and principles of fiduciary duty to clients; assess and manage client
exposure to LIBOR to protect their best interests
• Manage the impact to management fees resulting from portfolio valuation and benchmarks
(i.e., update discounting curve to generate compensating terms)
• Legal & portfolio documentation may require client consensus (i.e., bi-lateral agreements)
• Centralized / coordinated communication strategy
• Migration of OTC contracts by adding an adjustment spread (independently calculated)
DEEP-DIVE: LEADING THE RISK CONVERSATION
Depending on the institution starting the key activities to mitigate conduct risk with LIBOR transition may vary but in all
cases, regulatory expectation is for firms to proactively seek to understand their own and their client exposure.
Sell-Side (i.e., Investment Banks)
Buy-Side (i.e., Asset & Wealth Managers, Advisors, Brokers Hedge Funds, Mutual Funds)
Insurers
• Product valuation and discount rate curves require detailed explanation and documentation
• Suitability and appropriateness of sold products should be assessed; evidencing
considerations of the impacts to clients and clear communication of those is required
• The impact of product complexity and client sophistication is magnified
• Portfolio analysis and disclosure requirements drive client interactions
• Identify the extent to which portfolios, including clients’, have LIBOR exposure
• LIBOR transition office coordinates communication across investment teams
Client Communication and
Outreach
Contract Language and
Fallback Adequacy
Monitoring
Approach and Roadmap to 2022
Price Discovery and
Demonstration of Fairness
Provides Alternatives
Primary Key Activities

Significant change management required to mitigate conduct risk in all areas of the organization.
CONDUCT RISK – IMPACTS
• Identify all existing and new
contracts impacted by IBOR
rates across derivatives,
cash products and lending.
Identify all fall-back positions
• Introduce products based on
the new benchmarks
demonstrating fairness in the
selection of ARRs
• Document rationale for rate
selection and client impact
• Establish ongoing evaluation
of client impact of LIBOR
transition
KEYACTIVITIES
• Document contract
discovery and assessment
criteria
• Detail impact analysis and
decisioning factors
FIRSTSTEPS
• Impact assess IBOR
exposures and fallback
clauses so that customers are
not disadvantaged
• Revisit client communications
and disclosures to provide
transparency around future
risks and uncertainties
• Client outreach and
negotiations
• Review the clearing,
settlement, confirmations,
margin calculations, etc. and
identify opportunities for
revisions
• Identify migration approach
and tools required for the
bulk novation or cancel / re-
book of positions maturing
post December 2021
• Identify and review contracts
and fallback modifications.
• Establish central repository
of contracts
• Define negotiation strategy
and oversee contract
negotiations including
migration approach
• Complete new business
contract design
Operations Legal
• Identify the legal
implications, e.g. revisions to
standard terms and
conditions, agreements, and
other paper work
• Engage with regulators on
migration approach and
contract language
Front Office Business
• Update internal and
regulatory models for credit
risk as IBOR (unsecured)
and the alternatives (mix of
secured and unsecured)
may exclude credit spread
related to bank credit risk
• Update risk appetite, risk
policy, and feed thresholds
into risk register; and model
validation
• Assess impacts on liquidity
provisioning process
• Submit board approved
transition risk assessment to
PRA and FCA by 14th Dec
• Develop Senior Manager
briefings regarding required
updates to risk governance
(e.g. appetite, policy, and
control)
• Complete gap analysis of
current surveillance
parameters against new
market abuse scenarios
across jurisdictions with
differing RFRs
• Revise conduct risk
surveillance scenarios,
triggers and thresholds,
and update data
parameterization (e.g.
transaction eligibility,
lexicons, etc)
• Update compliance testing
and assurance protocols
for selected risk controls
• Identify regulatory
engagement priorities for
the bank, engagement
schedule, and business
advisory approach
Reg and ComplianceRisk

Evidencing answers to these questions and remediating any
inconsistencies or gaps is critical in managing conduct risk appropriately
1. Have you identified
the risks?
- Is there a comprehensive client
suitability and appropriateness
matrix reflective of the current
product suite?
- Have you clearly identified all
conduct risks related to the
transition?
- Is there a process for the
identification and assessment of
all product-specific conduct risks?
- Has scenario analysis been
performed to capture all transition
outcomes?
- Are all potential risks captured
within the conduct risk
taxonomy?
- Have you clearly articulated your
conduct risk definition, appetite,
taxonomy, outcomes, measures,
testing, tolerances and strategy?
2. Have you allocated
responsibility?
- Is there adequate governance in
place for the review, challenge
and approval of all IBOR-specific
programs?
- Is there adequate representation
of the compliance function within
all LIBOR program related
governance
- Are there adequate information
flows between product, model
and LIBOR change governance
- Are the roles allocated to Lines of
Defence Committees and clearly
articulated in governance forum
documentation?
- Is each conduct risk owned by
the 1LoD embedded in senior
manager statements of
responsibilities?
support mechanisms?
- Is there a client support and
outreach mechanism in place to
deal with LIBOR queries and
disputes?
- Do conduct risks related to
LIBOR transition and client
outcomes align to business
values / codes of conduct /
product design?
- Are all such conduct risks
mitigated properly by policies,
procedures, processes,
surveillance, monitoring and
controls?
- How would breaches, risk issues
and control failures be identified,
measured, mitigated and
monitored?
- Is there LIBOR -specific training,
supervision and performance /
breach management to
encourage LoD-appropriate
behaviors for all staff?
conduct MI?
- How does conduct MI align to
business / product goals and
conduct risks / outcomes?
- Is there a delineation between
the LIBOR -transition change risk
MI for new or modified products,
post-launch and BAU product
MI?
- How would the conduct MI be
designed to be concise and fit for
purpose? Will it inform senior
management whether they are
within risk appetite, show trends,
root cause analysis and identify
‘read across’?
- How does the conduct MI inform
reallocation of resource to
remediate ‘out of appetite’
conduct?
- Is data analytics used sufficiently,
accurately and consistently?
undermining factors?
- Are there any conflicts between
customer communications and
the wider conduct agenda?
- Is there a 3LoD assurance
process in place for the LIBOR
program?
- How do 2LoD assurance and
3LoD audit align to conduct risk
appetite and identify behaviors or
culture that undermine stated
expectations?
- How do governance, control,
training, performance
management and remuneration
processes support the LIBOR
conduct agenda?
- How are negative behavioral
economics biases (both customer
and employee) identified and
mitigated sufficiently?
The 5 FCA questions drive a more detailed set of LIBOR-specific questions which serve as a checklist for your conduct
risk framework.
ANSWERING THE FCA’S FIVE QUESTIONS ON CONDUCT RISK
Source: “Progress and challenges” 5 Conduct Questions – Industry Feedback for 2018/19
Wholesale Banking Supervision, Financial Conduct Authority, May 2019

CONDUCT RISK DASHBOARD
Identify the most
vulnerable
Counterparties
(factoring in
sophistication, conflicts
of interest and anti-trust)
Identify the Products
which should be
prioritized (factoring in
complexity, maturity
date, notional, trade
count, fallbacks)
Use the Conduct Risk Radar to
quantify and categorize the risk
across the program
Identify the internal
Owners of the products
/ relationships with the
highest risk
Conduct risk MI dashboard maps conduct risk across the LIBOR program through a customizable scoring methodology
driven by exposures, products and counterparty profiles.

DATA THAT PERMITS ACTION
Identify distribution of LIBOR
transition conduct risk across the
firm…
… and drill into the data to see the
relevant associated products and
counterparties to help plan and prioritize
a firm’s transition.
The dashboard allows firms to identify ownership of the high risk products and counterparty relationships and drill into
the underlying data to focus efforts to mitigate risk.

LIBOR and Conduct Risk: When and How Should You Mitigate?

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LIBOR and Conduct Risk: When and How Should You Mitigate?