The London Interbank Offered Rate (Libor) transition opens up a sizeable business opportunity for large consulting firms such as PwC, KPMG, EY and Deloitte and also for global IT firms, including leading players in India.
Individual banks, financial institutions and lending houses are expected to spend anything from $50 million to upwards of $100 million a year for the next two years until the migration is completed by the end of 2021. Analysts say IT will be 50% of this opportunity.
Regulators globally have asked firms to move away from Libor to other alternate, risk-free rates (RFRs). Derivatives, bonds, mortgages, loans, mutual funds, securities, underwriting, deposits, advances, pension funds and contracts, worth $370 trillion, are currently linked to the scam-hit Libor.
Opportunities around the migration include assessment of current exposure to Libor, design, development and implementation of new products based on new rates, creation of new valuation models, creation of fresh legal documents and policy frameworks. The transition involves a code replacement towards new benchmark rate.
According to Sreedhar Vegesna, Partner & Leader - Financial Advisory at PwC, the Libor marketplace is very large and it comprises of banks and all large lending agencies, including country lending from the World Bank and Asian Development Bank.
“We work with regulators on the impact of the migration on customers and banks. Our involvement will also include laying the migration road map, remediation, redrafting the contracts, planning for tax implications and offering technology support,” said Mr.Vegesna.
As far as the business opportunities are concerned, all financial products that are currently linked to Libor would be moved to an optimum benchmark. This would require remodelling, predicting tax implications, contractual changes and system infrastructure including processes and controls. The change would also involve designing new products or remodelling existing products, he added.
Gayathri Parthsarthy, National Head, Financial Services, KPMG in India, said: “Large consulting firms like us have multi-faceted capabilities and teams for planning, monitoring, stakeholder management, risk assessment, technology changes, communication and change management. Libor transition is about methodology and approach towards migration.”
Another Y2K wave
For technology companies, Libor transition is like another Y2K wave and it involves creating new systems, processes and platforms to support the entire migration.
Hansa Iyengar, Senior Analyst (Advanced Digital Services) at London-based Ovum Consulting, said Libor conversion would provide opportunity in systems integration, compliance, customization of packaged apps for meeting reporting needs and related consulting in the short term.
“Though this may not bring in multibillion dollar contracts for providers, it will result in an uptick in business for IT vendors,'' she added.
Ravi Andrews, senior risk and compliance professional, said Libor involves a seismic change and it provides an opportunity for consulting organisations to bring into play the entire range of their capabilities.
Majority of large banks and trading houses, including Bank of America, Bank of England, Merrill Lynch, JP Morgan Chase, Morgan Stanley and Japanese banks have started working on Libor transition.
However, Indian banks are yet to start any work towards migration as the regulator is yet to make any announcement in this regard.