From 30 June 2023, securities that reference LIBOR will not have a published index to use for interest rate calculations, pricing or valuation and will need to be updated. Ann Marie Bria, DTCC’s managing director for Asset Services Business Management, explains how the financial infrastructure specialist is helping the industry to manage this transition.
Related: Putting the 2023 LIBOR Cessation Transition into Focus
There has never been a wholesale discontinuation of a benchmark index. The London Interbank Offered Rate (LIBOR) has been the basis for the pricing of most debt instruments for more than 35 years and its cessation is a first for financial markets. While regulation stated that there should be no new securities issued after the beginning of 2022 that leverage the LIBOR benchmark, legacy contracts pose an issue. In fact, there could be more than 150,000 securities that have legacy contracts based on the LIBOR rate. On 30 June 2023, securities that reference LIBOR will not have a published index to use for interest rate calculations, pricing or valuation and will need to be updated.
"To prepare, firms should determine how they will identify and update securities that are impacted by LIBOR cessation by 30 June”
Client segments such as the fund accounting industry could be most impacted by this change. Those providers must account for interest to bondholders and address questions concerning the sourcing of accurate alternative benchmark rate information for pricing purposes. Market data vendors may also experience challenges since this information is not expected to flow through traditional data channels. As a result, these vendors are now partnering with the Depository Trust and Clearing Corporation (DTCC), allowing them to access the data on many of the USD LIBOR-impacted debt securities.
What must firms do to be ready for the June deadline?
The LIBOR cessation compliance date is fast approaching. Therefore, the industry must prioritise preparations to ensure its readiness. The cessation of a benchmark rate is unprecedented, as we have noted, and The Federal Reserve Bank of New York created the Alternative Reference Rate Committee (ARRC) in the US to identify challenges and solutions to address the new requirement. To prepare, firms should determine how they will identify and update securities that are impacted by LIBOR cessation by 30 June. While firms can update this information themselves, the ARRC has outlined best practices that market participants can follow, such as leveraging DTCC’s updated LENS solution or new data feeds being offered by market data providers.
How ready are firms for the June deadline?
There could be some challenges with meeting the June deadline, primarily due to the sheer volume of work that will be required to update legacy contacts. According to our records, with more than 150,000 contracts to be updated and only 5000 being updated so far and communicated utilising LENS, there is much work still to be done. We are committed to helping our clients to navigate this unique industry requirement.
DTCC has been an active member of the ARRC since the committee was formed to help the industry find solutions to challenges posed by the LIBOR cessation. As part of this initiative, DTCC has been working with the ARRC, industry bodies and market participant firms to create a centralised process for capturing and disseminating standardised benchmark replacement information.
DTCC’s LIBOR Benchmark Replacement Index Solution delivers an efficient process for issuers, agents and any parties responsible for the dissemination of new benchmark replacement data to communicate with investors and the market. The solution is built utilising DTCC's LENS portal, providing users with access to information disseminated by issuers or agents of current USD LIBOR debt securities whose rate is transitioning to an alternate benchmark. Alternatively, DTCC Data Services is providing the disseminated data on these USD LIBOR-impacted debt securities to market data vendors and other subscribed users via automated data feeds.
This article was originally published in Security Finance Times on May 16, 2023.