77% of financial firms not prepared for LIBOR transition

Over half of the firms (54%) surveyed identified LIBOR exposures, but have not yet taken necessary action to resolve their liability. Of that number, 58% had not catalogued transition provision, and 42% were unsure of what to do next. Almost a quarter (23%) of the firms surveyed have not begun any formal processes to identify exposure.

When asked whether financial institutions are on track for the transition, 34% believe that they are on track, despite the stunted progress across the majority of the industry. However, this could indicate that firms are underestimating the extent and complexity of work required for a successful transition.

Worryingly, a similar number of firms (31%) have only just begun thinking about their transition and are unsure whether they are on track. 14% of respondents have not begun planning, with a further 14% concerned they will not be ready before at least Q1 2022, three months after the cessation date. Only 7% of firms predict they will be ready by the end of H1 2021, well in advance of the deadline.

Jennifer Press, managing director of alternative asset advisory services at Duff & Phelps, said: “The LIBOR transition is one of the greatest regulatory-driven changes ever, and inevitably it requires complex planning, thought and analysis. It’s therefore quite surprising to see that just nine months away from the hard deadline, the majority of financial institutions who were polled do not have a comprehensive plan in place."

Marcus Morton, managing director of valuation services at Duff & Phelps, commented: “The results indicate that although the majority of firms have identified their LIBOR exposures, many have yet to formally catalogue the transition provisions. There is a real fear that many are pinning their hopes on fallback provisions written within existing contracts. The reality is that fallback language may not suit each and every party, and in some cases, contracts will fail if such provisions are inadequate. It will pay in the long term to properly assess exposure of each and every contract, even if firms are under the impression fallback language is sufficient."

Rich Vestuto, managing director of legal management consulting services at Duff & Phelps, added: “Employing technologies such as natural language processing and AI to analyse, interpret and extract relevant clauses and LIBOR-influenced language on target contracts could go a long way to help firms fully understand their exposure, but they must start the process now.”