Firms that invest in robust training and education strategies will mitigate conduct risks and increase the likelihood of a smooth transition away from LIBOR. In the process, they’ll also move closer to achieving education excellence in LIBOR transition.
To ensure an orderly and successful transition from LIBOR to more robust alternative reference rates, it must be broad-based, meaning it can’t be limited to financial and non-financial institutions. Their clients and counterparts must also be adequately prepared.
Scott O’Malia, the CEO of the Internal Swaps and Derivatives Association (ISDA) stated that “…education will lead to momentum, and the momentum will be essential to facilitating the transition”. While the effort does have some momentum, much work lies ahead, and the pace of progress must accelerate as we approach the expected termination of LIBOR at end of 2021.
Education is a critical component of a firm’s LIBOR transition program for multiple reasons, including that the new Risk-Free Rates set to replace their respective IBOR’s are fundamentally and economically different. Regulators around the globe have universally called on the firms they oversee to establish comprehensive internal training and communication plans.
A firm’s communications and education strategy should be aligned with developments in the market to ensure that engagement with both internal employees and external clients continues to be appropriate and effective. For example, where conventions for certain products are still evolving across regions and/or currencies, firms will want to take into consideration the correct timing of communications with clients about alternative reference rates for those product types.
“…education will lead to momentum, and the momentum will be essential to facilitating the transition”Scott O’Malia, CEO of the International Swaps and Derivatives Association (ISDA)
There have been numerous recent developments regarding LIBOR transition education from both regulators and National Risk-Free-Rate working groups. The Alternative Reference Rates Committee’s (ARRC) recently published an Internal Systems & Processes tool which recommends conducting training sessions and establishing dedicated websites where educational material can be accessed. The ARRC has also held a series of short educational webinars. In the UK, the Sterling Risk-Free-Rates Working Group also released educational videos and materials. These resources are intended to compliment not replace internal education efforts at individual firms, which still bear the primary responsibility of implementing a robust education strategy.
To satisfy regulatory expectations and position firms for success in transitioning away from LIBOR, we recommend leaders take these five actions to achieve education excellence:
1. Deploy firm-wide online training courses
Online learning has made significant leaps in quality and acceptance in recent times, undoubtedly hastened by the COVID-19 pandemic. Companies must deploy firm-wide dedicated LIBOR transition eLearning courses to cover the basic and fundamental concepts around LIBOR transition. We recommend our foundational self-paced course Fundamentals of LIBOR transition and the Secured Overnight Financing Rate which covers the key competencies of LIBOR transition. Additional specialized eLearning courses should be provided to frontline client-facing staff and risk managers. At a minimum, we recommend front office staff complete online learning modules that dive deeper into the mechanics of SOFR, conduct risk management, as well as fallback language. To ensure compliance, managers should maintain continually updated records of this training and enforce an internal penalty system for individuals who fail to complete it on time.
2. Conduct functional workshops
In addition to generalized online training, firms should conduct separate tailored ‘face-to-face’ functional workshops for highly impacted areas (ideally face-to-face, although they may also be held virtually via interactive webinars). They will help identify and socialize internal issues and challenges. The workshops should incorporate different LIBOR cessation scenarios and include case study-based training, which would allow attendees to ask questions. At the very least, we recommend holding workshops for staff in the front office, legal and compliance, and operations and risk. Individuals should be trained in relation to the distinction between the presentation of alternative rates and products in an objective way allowing for the customization of client communications.
3. Hold regular internal update meetings
Hold internal update meetings with regularity among product area, support functions, and across legal and compliance. Socialize key industry and regulatory developments at these meetings in addition to Firm LIBOR transition progress reports. Firms should designate client representatives, with subject matter expertise in LIBOR transition, to discuss transition issues in addition to their day-to-day sales representatives. Representatives from the internal LIBOR transition PMO office should host or at least attend these internal meetings to track and monitor risks, issues, and dependencies.
4. Set up a hotline for questions
Set up a telephone hotline for questions and escalation of LIBOR transition issues for each business line. For multinational organizations, multiple hotlines may be required in different geographic jurisdictions. A centralized email inbox should also be established where responses are aggregated, analyzed, and managed by the LIBOR transition PMO office. Stronger LIBOR transition programs have set up separate hotlines and centralized email inboxes for both internal and external queries.
5. Create internal and external microsites
Firms should publish an external microsite that contains general information and related resources. Internal microsites should contain details of the Firm’s LIBOR transition program, key internal contacts, and Frequently Asked Questions (FAQ’s). The FAQ’s will change over time and should be a dynamic set of questions that are accessible firmwide. Internal microsites should also include any internal playbooks that may be available for both general LIBOR transition program execution as well as for specific events such preparations for the Clearinghouse discounting ‘single-step’ switch.
Education is a key component of a smooth transition away from LIBOR. By taking these five actions, firms will have made great strides toward achieving education excellence.
Mr Burnett is the Director of SOFR Academy and is based in New York where Mr Babu is an Advisory Board Member. SOFR Academy’s foundational online course is now available for enrollment here. This insight is available for download here.