In the inaugural publication of our LIBOR Leaders Interview Series, Simon Winn of BNP Paribas shares his views on the current state of the industry’s transition away from LIBOR and discusses some of the remaining challenges that lie ahead.
Simon Winn is Chief Operating Officer to the transformation of the U.S Regulatory Strategy and Policy platform and participates in the coordination of BNP Paribas’s IBOR Reform efforts in the United States. Simon represents BNP Paribas at the Alternative Reference Rates Committee (ARRC) where he also co-chairs the ARRC Regulatory Working Group. He is also a member of the Market Risk Advisory Committee Benchmark Reform Sub-committee at the Commodity Futures Trading Commission.
In his nearly 18 years at BNP Paribas, Simon has held a number of senior roles across the bank including responsibility for management of technology and operations functions in North America as well as public policy and regulatory affairs for the Bank. Simon has been involved in BNP Paribas’s IBOR transformation efforts since 2015 and leads BNP Paribas’s engagement with the ARRC and official sector across the IBOR topic.
In November, Simon spoke with SOFR Academy’s Marcus Burnett to reflect on the progress that BNP and the broader industry has made in transitioning away from LIBOR towards more robust alternative reference rates. He also provides his views on what it will take for businesses to be successful in the transition.
SOFR Academy: As you reflect on the last two years of the America’s IBOR Transition at BNP Paribas, what are some of your biggest insights?
Simon Winn: We identified early on three key characteristics of the reform effort that would make this transition unique and require strong official sector and private sector partnerships, unique efforts to create liquidity accelerating events and the confluence of effort by market participants, industry utilities and industry vendors towards a common goal and final transition date. This guided our internal planning at an early stage:
- IBOR Reform is addressing safety and soundness, market integrity and price transparency failings with LIBOR, rather than the consequence of the organic intersection between client demand and new product innovation; which is the more typical path to building a new product and market,
- SOFR, the rate selected to replace USD LIBOR, was chosen predominately due to the robustness of underlying transaction volumes that supported the new index. The absence, with SOFR, of key characteristics such as a term rate and a credit sensitivity were recognized at the time; the industry will either need to adapt to their absence or build them back into the new rate over time
- The transition is contained by a date, December 31, 2021, at which time regulatory authorities have warned that LIBOR should be expected to demise.
SOFR Academy: Has a particular challenge stood out for you both internally within the IBOR program and externally in the market transition?
Simon Winn: There were two particular early internal challenges. Firstly, the use of LIBOR is ubiquitous within a bank. Its use and the recording and distribution of LIBOR as a data variable and data series permeates well beyond systems directly supporting the derivative and cash product booking, processing, settlement and risk management systems. Inventorying this early on and then bringing those teams into the transition governance was key. Secondly, LIBOR exposures extend across multiple business lines and across various divisions in a bank; aggregating that data into a central repository required investment in process and tools. Externally, there are many tasks to perform, and while I would not elevate one as most important, we gave a great deal of early thought to communicating the transition progress clearly to our clients. There are many streams in the industry and the confluence and intersection of these paths required clear messaging.
SOFR Academy: What level of LIBOR transition awareness of are you seeing across your client base?
Simon Winn: It continues to accelerate as a consequence of industry and bank specific efforts. The ARRC and the official sector have brought a significant focus to market education and awareness and these efforts have borne fruit.
Preparedness across institutions and corporates continues to accelerate. While it remains to fully secure the engagement and awareness of the smaller U.S corporates (and therefore their comfort to engage in early LIBOR to SOFR exposure transformations), which are delayed a bit by their shift in focus due to the immediate COVID impacts earlier this year, this continues to develop.
“The ARRC and the official sector have brought a significant focus to market education and awareness and these efforts have borne fruit.”
SOFR Academy: Efforts are underway in a number of jurisdictions to pursue a legislative solution for so-called ‘tough legacy’ contracts’. Do you worry about the tough legacy issue and what action should businesses be taking?
Simon Winn: Yes this is a key issue. Left unresolved it risks legal uncertainty for all parties. The U.S efforts to develop a NY State Legislative solution or possibly a federal level solution are progressing. The challenge is to navigate this to conclusion, in advance of the end of 2021, given an already crowded legislative calendar and competing policy priorities in Albany and Washington DC. Identifying your own “tough legacy” inventory, distinguishing between those contracts where you lead as opposed to being part of the syndicate is key. Randal K. Quarles, Vice Chair for Supervision addressed the legacy topic recently as part of comments before the House Financial Services Committee and Senate Banking Committee, indicating that the official sector was very focused on this issue and would revert in one to two months with further communications in this regard. Business should ensure to stay well informed of market progress on this issue and engage early in discussion with clients and note holders regarding these exposures.
SOFR Academy: LIBOR transition preparations are still in early stages at some Corporates. What advice would you have for a Corporate as they mobilize a LIBOR transition program?
Simon Winn: I would highlight two aspects. Firstly, there is no need to discover this in isolation. Reach out to your bank relationships for reflections. Then supplement this with industry resources, such as those published by the ARRC and the eco-system of intelligence that exists around this. Secondly, have in mind the expected demise date for LIBOR is December 31, 2021 and plan to this as your base case.
SOFR Academy: Usage of SOFR in lending markets is still in its relative infancy. What do you think will be the key enablers in order to grow this market?
Simon Winn: There are a number of expected catalysts for derivative liquidity scheduled for the second half of 2020, especially the ISDA protocol, which is in progress, and the discounting changes at the CCP’s (CME and LCH), which has now taken place. These should further secure the liquidity in the hedging market for lending products. This together with new Hardwired fallback language for loans, recently released by the ARRC, and continued education and outreach by the industry and banks, are expected to be key enablers for the growth of the SOFR market. We are watching the U.S and London based syndicated loans market closely in this regard.
SOFR Academy: How important is the role of education in helping to achieve a broad based and orderly transition from LIBOR?
Simon Winn: It’s critical as IBOR reform is a complex undertaking. We saw early on the need to explain clearly to clients the various actions necessary for the market and individual firms to undertake. Many requirements will confluence to secure the optimal foundation for large scale exposure transformations to begin and awareness and understanding of their sequencing and timing will best prepare businesses to manage their own planning. This will be especially important as they consider the optimal timing to begin large scale exposure transformations.
SOFR Academy: Thank you very much, Simon.
Simon Winn: Thank you.
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Simon Winn is Managing Director and COO Regulatory Strategy and Policy at BNP Paribas in the U.S. This interview was conducted by Marcus Burnett, Director of SOFR Academy based in New York.