Banks face arduous task transitioning loan books to RFRs
The deadline to transition from IBORs to alternative risk free rates (RFRs) for some currencies is drawing closer and one of the critical aspects challenging the smooth transition of loan books relates to the fact that RFRs are fundamentally different from IBORs. RFRs are overnight rates and are only used to price overnight instruments.
Adopting RFRs as benchmarks for term instruments, such as a loan that receives interest on a quarterly basis, requires a process of calculation to convert them. These calculated benchmark rates, referred to as Adjusted Reference Rates (ARRs), are based on certain conventions, such as the look back and observation period. These conventions are likely to differ for different segments of clients and different products.
To address this, banks will need to upgrade their systems to be able to calculate the ARR from RFR for each security. For some bank legacy systems, this will prove challenging.
As part of its effort to provide holistic transition solution to its clients, financial services advisory firm Fieldfisher Capital has launched a proprietary ARR calculator called ‘Fieldfisher Abacus’ for its clients. The online tool automates the calculation of backward-looking compound ARR rates for given currencies and tenors, based on the rates published by the respective administrators.
“Some bank legacy systems are unable to adapt to the changes being felt by the transition from LIBOR,” said Ashwani Roy who spearheaded the development of the Abacus tool. “They need a straightforward solution that integrates with their existing system and processes, that is secure and is capable of scaling up as conventions and methodologies continue to evolve.
“Fieldfisher Abacus is flexible enough to be able to handle different conventions agreed with different clients or adopted on different products; it completely integrates with the existing banking systems so that there are no manual interventions and it is more cost efficient than other solutions in the market.
“With the deadline for LIBOR transition fast approaching, Abacus provides banks with a bolt-on solution that has the capacity to produce both ARRs and interest accruals, is able to accommodate any set of bespoke conventions as agreed between the bank and the client and accounts for floors both on legacy and new contracts.”
Fieldfisher Abacus is a registered trademark and supported by the technology team at European law firm, Fieldfisher LLP.