Preparing Clients for LIBOR Discontinuation Scope and Challenges: Part 1 of a Murex Experts Q&A

In a retrospective of the LIBOR discontinuation journey—a major event atypical for the markets—Murex interviewed the internal experts most intimately involved with helping clients around the world to transition and meet diverse needs of the event. The resulting interview, which is split into two parts, has been edited for length and clarity.

From your perspective, what differentiates this reform from changes we regularly witness in financial markets?

Benoit Abbey, linear rates trading product manager: Compared with other regular changes, this reform differs by orders of magnitude in three dimensions.

The first is scope. The scope is massive. This reform impacts the G5 currencies and currencies building their index on top of USD LIBOR. The latter group includes FX-implied indices in India, Singapore and Thailand, as well as other discontinuations to come. These include Mexico, South Africa, Canada, Scandinavian countries, Poland, and more. In the end, every single market participant was impacted by the reform.

Romain Piernot, CS APAC, head of interest rate derivatives team: On this first point: The fact that all markets are impacted at the same time with the same timeline is unique to this reform.

BA: Then there is the functional dimension: The reform totally changed the nature of the market itself. We went from term rate indices—with a known fixing 1-month, 3-month, 6-month, etc., upfront—to compounded rates, where the all-in fixing is known in arrears. This difference changes everything: the payoff, the rates computations, the estimation methods, the risk profile. Since market participants were not used to this new world, some “flavors”—lockout, lookback, observation shift, payment delay, term rate indices, capitalized indices and published compounded indices, for example—were introduced. An even more complex market was—is—the result.

Finally, there’s the transition dimension. This reform does not silo the “old world” and the “new world” next to each other, sealed off from each other, without any interaction. All concerned trades had to be transitioned. This was a big change due to the scope (again) of trades and the numerous possible transitions—these include LCH conversion, CME conversion, ISDA fallbacks, FX implied fallbacks and bilateral renegotiations.

In meeting transition requirements, did Murex approach customers or did customers approach Murex?

Didier Loiseau, global head of trading, co-head of LIBOR discontinuation program: Murex was in advisory mode with smaller customers. We were very active in the market and had regular discussions with market infrastructures, big players and other important actors. That input and dialog from diverse participants gave us a comprehensive view on the topic. We even built a “transition plan” to explain all transition paths to some customers. Clients valued that a lot.

Antonio Chebly, CS EMEA: Murex started transition investigation and discovery early compared to competition—and to some clients. Murex’s early analysis and work with major players in the industry and key stakeholders allowed us to be aligned with the market evolution and to approach clients with a plan to enable early transition preparation. At the same time, we ensured close follow-up and preparation for any developments.

All this preparation, research and work helped Murex approach clients. We confidently shared key information on the transition and we worked with them to be ready for next steps in a timely way.

Was the approach to the transition generally the same across the client community, or did you notice significant differences?

BA: Generally, we saw a similar approach. We did, however, notice exceptions.

Some markets—India, Singapore and Thailand, for example—are more complex due to the FX implied indices. It followed that reform would be more complex. Regulators published fallbacks later than other markets. Specifications were blurrier. Stress followed. As a result, we felt pressure to deliver solutions quicker. The few participants that tried to find tactical workarounds instead of resorting to full-fledged, well-thought-out solutions generally faced tremendous issues and finally decided to resort to packaged solutions.

Quentin Guillerm, CS EMEA head of trading: In EMEA, we saw basically four approach types. There were instances where the clients had no exposure to IBOR being discontinued and were out of scope. A rather low, or limited, number of clients wanted to manage the transition on their own—some later came to us for assistance in managing the transition. Some relied on Murex for advisory to manage the transition, but implemented the transition by themselves. The last group relied on Murex for advisory and either partially or wholly used our solution, MX.3 for IBOR Reform. The latter group was the largest.

What has been the biggest technical challenge for Murex?

BA: Providing the solution for transitioning legacy trades. We had several constraints.

It had to be compliant with the variety of transitions I mentioned above. It also had to be compliant with the various flavors of the transitions, including the additional payment delay and different typologies of indices—for example, FX-implied versus regular compounded indices.

Meeting performance criteria was critical, on two main aspects. We had to be able to transition an enormous mass of trades in less than a weekend. Besides, once conversion was made, we had to make sure that books made only of RFR derivatives could be calculated (from P&L and risk perspective) in the same time as a book made of LIBOR derivatives. That was paramount, and a key challenge to overcome.

Then, there was an accessibility factor. To benefit from all new developments and stay ahead of security, market, regulatory and technology compliance, clients regularly upgrade their MX.3 platform. This is standard practice. However, in the context of IBOR reform, we made this solution available for all our customers in their version—so, without a major upgrade—to facilitate the transition.

The second part of the Q&A is available here.