At the end of this year, the LIBOR we currently know will be discontinued. For some currencies, the calculation methodology will be adjusted, while others will move to a brand new or alternative risk-free rate (RFR). This also holds for the dollar LIBOR, which will be replaced by the Secured Overnight Financing Rate (SOFR). However, some currencies use the USD LIBOR as a basis for their current reference rates, mainly due to liquidity concerns. Therefore, these FX implied rates face an additional challenge.
On 23 October 2020, the International Swaps and Derivatives Association (ISDA) launched the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol. The supplement and the amendments resulting from the protocol will take effect on 25 January 2021.
The Financial Conduct Authority (FCA) ensured bank panels support LIBOR, and this is coming to a close at the end of 2021. Currently more than 80% of CHF loans are priced with the CHF LIBOR as a basis. The transition to a new reference rate poses a number of different challenges for the market. This fifth part of our article series presents the checklist of the Swiss National Working Group (NWG) and the Zanders IBOR Assessment.
The end of the IBOR era is near and IBOR transitions are a big challenge for both the regulators and the insurance industry. Survey results have revealed that most of the insurance firms already have a formal transition plan in place. However, these often lack details, unified planning, and strategizing investment priorities. Nevertheless, we need to anticipate for the transition before the end of 2021.
At the beginning of 2020, the coronavirus COVID-19 disrupted the world in a manner that hardly anyone was prepared for. A vast amount of resources is required to get through this phase. For insurance companies, this means facing greater uncertainty regarding the management of financial risks on their balance sheet at a time when they are already dealing with the low interest rate environment and major regulatory changes, such as IFRS 17.