deloitte uk ibor transition operations forum
TRANSCRIPT
Deloitte Operations IBOR Transition Forum
April 2020Nomura - Change as a Service – October 2019
2
Agenda – Operations IBOR Transition Forum
1. COVID-19 impact on IBOR Transition
2. IBOR Transition market update
3. Testing impact
4. Our IBOR team
Slides 4-5
Slide 7
Slides 9-12
Slide 14
3
COVID-19 impact on IBOR Transition
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COVID-19 impact on IBOR TransitionHow the recent outbreak may affect the current progress of the IBOR Transition globally
Client impact
Impact on client communications, inbound queries and method of client
outreach
1
Programme governance
How will governance and workstreams continue to operate under current
COVID-19 conditions?
2
Resourcing
How do you continue with planned ramp up and onboarding of team
members to meet workload?
3
Refinancing
How is LIBOR transition being factored into the suitability of refinancing and
restructuring products?
4
Vendors & Infrastructure
How may COVID-19 have an impact on timelines and activity?
5
Programme risk
COVID-19 should be added to your LIBOR risk registers
6
We will discuss the impact of COVID-19 on the IBOR Transition and how changes may need to be considered over the next 6 months. Werecognise the fact that firms need to ensure there is consistent messaging from regulators now that there may be a desire for ‘extensions’.
In addition, there are further considerations which should be factored into future decision making:
5
COVID-19 impact on IBOR TransitionHow could the market be impacted over the next 6 months if the BoE change the deadlines?
As this whole transition is happening in coordination with other jurisdictions across the globe (e.g. through the work of the Official Sector Steering Group (“OSSG”)), moving targets relevant to GBP LIBOR may inevitably, impact the targets and timelines from other jurisdictions, for other LIBOR currencies.
Whilst there are five LIBOR currencies, and five regulatory convened working groups, each with their own specific considerations on LIBOR transition within their own jurisdictions, transitioning these LIBOR rates requires similar efforts across all jurisdictions (RFR market development, customer outreach, contract re-papering, IT system development etc.). Moving targets in relation to one currency therefore, can impact on the pace of transition in others, including the US, given the extensive use of USD LIBOR across the globe.
How will it affect the international push away from the benchmark, especially in the US?
Caution should be exercised in the use of the word “deadline”. There aren’t “deadlines” – regulators, such as the BoE (in respect of GBP LIBOR), have set transition targets (e.g. the non-issuance of GBP LIBOR cash products by end of Q3 this year).
Amending these target dates further is important:
1. Firms, notably regulated firms, will have developed plans and actions in order to meet the targets as currently stated
2. There are notable external dependencies, which would need to be considered e.g. IT systems and 3rd party vendor infrastructure
3. Should targets move, there could be implications to the depths of liquidity in newly developed RFR markets
If the BOE pushes back Libor transition deadlines, why will this matter?
6
IBOR Transition market update
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IBOR Transition market updateWhat is the latest news in 2020?
NAMEMEA EMEA
FSB letter – February:
o The Financial Stability Board (FSB)
published a letter to the G20, welcoming its
focus on LIBOR transition as a priority for
this year
o The G20 letter was sent to emphasise the
need for progress in 2020
ISDA Documentation – March:
o ISDA published the results of the
Consultation on documentation fallbacks
for Derivatives referencing EUR LIBOR
and EURIBOR
o As per ISDA's prior consultation, the
majority of respondents agreed with an
implementation based on €STR
Swaptions update – February:
o The EUR RFR WG has launched a
consultation on swaptions (legacy and
new)
o This was based on EUR products that
could be affected by the discounting
change for cleared derivatives from the
use of EONIA to €STR effective
BoE & FCA letter – March:
o A joint letter from BoE and FCA was sent to
trade associations on how LIBOR transition
will affect their stakeholders and next steps
o FCA and BoE asked trade associations to
help raise awareness among their networks
HMRC tax impact – March
o The HMRC has issued draft guidance and a
consultation on the tax impacts arising
from LIBOR discontinuation and other
benchmark reform
o The response deadline is 28th May 2020
LIBOR linked collateral – March:
o BoE has announced that from Oct 2020, it
will make newly-issued LIBOR-linked
collateral ineligible and progressively
increase the haircuts on existing LIBOR-
linked collateral it lends against
SOFR publication – March:
o From March 2020, the Federal Reserve
Bank of New York, as administrator of
SOFR, began publication of 30, 90, and
180days SOFR compounded averages
o They also started publishing the SOFR
index
Spread Adjustment – March:
o The ARRC has extended the deadline for
responses to its consultation on Spread
Adjustment Methodologies to 25 March
2020
APAC
JFSA Survey – March:
o The JFSA released the results of its
LIBOR survey showing views of progress
in the region
Singapore key priorities – March:
o The Association of Banks in Singapore
has set out its key priorities to achieve a
smooth transition from SOR to SORA
along with a roadmap for 2020 to 2021
LCH update – March:
o LCH has confirmed they see no reason to
deviate from the timeline they have
previously communicated
o However if members were to advise of
challenges they would consult and consider
adjusting their approach
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Testing Impact
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Business Challenges – Making Informed Decisions on IBOR Transition
How can business stakeholders understand the risks to their day to day operations
Business Risk
Mitigation
How can I understand the resource and operational impacts of the IBOR Transition to my Business?
How do I protect my operational services from impact during or after the IBOR Transition?
A change programme such as LIBOR will produce reams of data and information that provides views on how the programme will be executed, when business functions will need to be available and what the impacts on front to back processing will be. But how can this be translated into
a true business view? How can it be used to react to the ever changing nature of the programme with sufficient time to minimise impacts?
Depending on the IBOR transition approach the business engagement will vary, with different demands and considerations based on resource availability, impacts of critical periods in the year and ability of non business stakeholders to be able to articulate ‘what good looks like’.
Defining an interlocking approach to acceptance for a business function and into the IT team are key for an efficient and appropriate approach.
Test Reporting
/ MI
Central Co-
Ordination
AI Driven Insights
Business Process Driven
Coverage
Quality Gating
Processes
UAT Co-Ordination
& Execution
Parallel Run
Live Proving &
Fix Forward
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Business confidence will require a pragmatic, efficient and clear approach to validation
Replacing IBOR – Front to Back Testing
IBOR will require banks to update their systems, processes and tools across their F2B business and technology structure. The activities required to provide confidence in the accuracy of such changes across multiple internal and external systems is complex and requires careful planning and communication.
Front
Office
Pre-Trade
Trade Capture
Data
Pro
vid
ers
Matc
hin
g
Pla
tfo
rm
s
Fin
an
ce
Rep
ortin
g
Simulation Views
Risk
Credit Risk
Market Risk
Limits Management
Ops
Trade Validation
Trade Confirmation
Settlement &
Clearing
Finance
Hedge Acc
Finance Accounting
Reg Reporting
Ris
k S
yste
ms
Paym
en
ts
Pric
e F
eed
sT
rad
e R
ep
osito
ry
Exch
an
ge
Testing of FO systems to ensure trade capture and booking systems are able to book trades with new ARR referenced products/configuration changes.
Aim for early testing of the FO systems for new calculations, coupon payments and pricing of new trades by using automation of Pricing Feeds and Simulations.
The risk models, valuation and discount models will need to be validated for the accuracy of curves, trade analytics and trade pricing, along with Fund Transfer pricing
Automate the testing of risk management workflows; use machine learning and AI to predict the generation of new price curves and then use them to test risk and valuation modelling.
Testing of Treasury management and supporting platforms to enable balance sheet funding, hedge accounting and cash-flow forecasting.
Establish a robust test data framework which supports the enablement of fully automated data management by filling gaps in available production data.
Failure to test the existing validation flow can mean trades not being settled and cleared in time, leading to delays in payments and regulatory breaches.
Harness business and SME experience in creating integrated F2B environments and containerized third party interfaces using service virtualization to allow for shorter and quicker test cycles.
Valu
e
Challenges Suggested Approaches
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UAT Testing Approach – Approach 1 (Full Front to Back testing by product)
• Front to back testing of high impact products for day 1. Other medium and low impact products in later phases of testing
• System testing and System Integration testing to be executed by IT Test teams with help from BAs. UAT testing by business in a phased approach
• All workstreams need to be involved.in all phases.
• Risk-based approach to testing which results in high quality and minimum impact
• Business users trained and reusable test cases created for next phases of the IBOR programme
• Proven front to back flow testing providing confidence and requirement of minimal testing for later stages.
F2B SIT
Product 1 Product 2 Product 3 Product 4
F2B UAT
Build Build BuildBuild
Design Design DesignDesign
Unit Testing Unit Testing Unit TestingUnit Testing
System Testing
System Testing
System Testing
System Testing
IT T
eam
sIT
Test
Team
s,
BA
Busin
ess
Period 3Period 1 Period 2
Test Data
Approach
Environment
Risks
Time
• Risk to timelines : High
• Risk to test coverage : Medium
• Front to Back environment required with most interfaces integrated and all third party environments aligned
• All batches required to test finance reporting. Testing of month end and EOD reporting
• Test data required for all workstreams front to back, a combination of synthetic and available data from production will likely be used.
• All F2B data feeds and interfaces required for FO, OPS, Risk and Finance
Advantages
• Smaller SIT and UAT test cycles
• More time required for test coordination during the test phases.
F2B SIT
F2B UAT
F2B SIT
F2B UAT
F2B SIT
F2B UAT
Front to Back Testing of individual product flows across the applications stack
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UAT Testing Approach – Approach 2 (Front Office to Ops, separate Risk & Finance test)
SIT
Front Office Ops Risk Finance
UAT
Build Build BuildBuild
Design Design DesignDesign
Unit Testing Unit Testing Unit TestingUnit Testing
System
Testing
System
Testing
System
Testing
System
Testing
IT T
eam
sIT
Test
Team
s,
BA
SIT
F2B SIT
UAT
F2B UAT
Period 3Period 1 Period 2
• System changes and testing per workstream. E.g. Changes to front office and Ops systems in phase 1. Risk and finance in later phases based on data feeds from phase 1
• UAT testing by business per workstream
• All workstreams need not to be involved in all phases of testing
• Early testing of the front office functions allows more complex and critical testing to complete first
• Test results from the front office and Ops can be replayed to test other back office and finance reporting tests.
Test Data
Environment
Risks
Time
• Risk to timelines : Low
• Risk to test coverage : High
• Full Front to Back environment is not required allowing asset classes to focus on internal integrations
• The environment when built will be required for a longer duration
• Limited test data required. Reusable test data available from initial phases of testing which can be replayed for next phases
• More up front effort to specify specific data required for Risk and Finance
• Longer SIT and UAT cycles
• Test coordination require less effort in initial phase with increasing requirement of skills and resources in later phases
Busin
esss
Front-to-Middle testing of all the products and events followed by integration into back office functions
Approach
Advantages
13
Meet the team
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Our IBOR Team
Meet the team
Mark Cankett
Audit and Assurance PartnerLondon
+44 7810 657468
Ed Moorby
Risk Advisory PartnerLondon
+44 7803 619121
Stephen Farrell
Audit and Assurance PartnerLondon
+44 7775 798493
Neil Brown
Consulting Partner (Testing)London
+44 7780 712972
Mike Hill
Consulting Director (Testing)London
+44 7760 991374
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