IBOR Fallbacks and System Implications

What are the system implications of BBSW being replaced by AONIA

It’s been a while since I last wrote on here, well actually a really really long while. All I can say is “busy times” but something has got my attention and I suspect it should have yours.  AONIA.

What are the system implications of BBSW being replaced by AONIA

LIBOR is on the nose.

With all the issues over recent years with LIBOR, the UK’s Financial Conduct Authority is requiring banks to only input into LIBOR until 2021 and that’s surprisingly close.  Various Reference Rate committees have suggested fall backs for the major currencys and these include SONIA for Sterling, SOFR for US and locally, AONIA (I have no idea how that is pronounced).

The FTA recently released an article on what this is all about and what it means, and it quickly covers a lot of very good points.  Please take a minute to read the article here:  IBOR Fallbacks: 7 Questions Corporate Treasurers should ask

How is this a System Issue

This article got me thinking though of the detail from a Treasury System perspective.  Ok, LIBOR, possibly BBSW and other Reference rates are going.  What are the system implications if BBSW was replaced by AONIA? And what are the implications of LIBOR being replaced by some reference rate.  This is not just about your next rate set on your Cross Currency swap, this also could impact local swaps and floating debt.  And it’s not just about rate setting, valuation curves are often based off these reference rates so do rate feeds and internal valuation curves need to be rebuilt.  If they do, will it be valid to use historic BBSW and LIBOR rates for historic and projected risk valuations.

Or will there be incentives to move more to IOS style hedges and how will your system cope with these.

Another possibility is a need for some form of transitional function. Perhaps the ability for transactions to be linked to a Reference rate but have an embedded option of sorts, that get’s triggered if the under lying reference rate fails.

Now a lot of this requires thoughts on policy. There will also be engagement with counterparties and auditors on the best approach. Some renegotiation around contract terms will be needed.  All these changes then need to be implemented in your Treasury System. One thing I’ve learnt, Treasury Systems are not all the same. Each will have it’s own “nuances” when it comes to recording and coping with these changes.

What are the System Implications

Some systems will allow you to lock in the historic valuations and simply move to the new valuation basis, others will see this underlying contract change as cause to blow away all historic postings, including accruals.

Perhaps the change is large enough, from your system’s perspective, that contracts are to be closed out and reinstated with the new reference rate but then what impact does this have on realised PL. And hedge accounting, give me a few more days to think about the implications there.

Alternatively, can we quarantine existing trades and manage fallback options on new trades? Even then, what will the valuation curve move like should the Reference rate falter?

If you are still reading and want to know more below are some references that might start you on your journey:

More Reading

IBOR, A Global Take

IBOR Fallbacks and System Implications

Evaluating the Impact: https://www.risk.net/regulation/6972566/evaluating-the-impact-of-libor-fallback

A Need for Fallbacks: https://www.bis.org/publ/qtrpdf/r_qt1903e.htm

BBSW, A Local Take

EY Paper on Impact to Australian Insurers: https://www.ey.com/Publication/vwLUAssets/EY-ibor-transition-impact-on-australian-insurers-april-2019/$File/EY-ibor-transition-impact-on-australian-insurers-april-2019.pdf

BBSW Fallbacks and System Implications

Is BBSW still appropriate: https://www.rba.gov.au/speeches/2017/sp-dg-2017-09-08.html

What’s AFMA’s Take: https://afma.com.au/policy/member-news/2019/2019_05_IBOR_Transformation_update.pdf

Fun stuff, what’s the IAS39 and IFRS9 Considerations: https://www.aasb.gov.au/admin/file/content105/c9/ACCED288_05-19.pdf

Next Steps

As you can see from the above ramblings, after extensive research and many late night readings I have to admit, I don’t know what this means to you and your system. I’d be interested though to share thoughts and ideas. What are the system implications of BBSW being replaced by AONIA. Do you have any contracts that reference LIBOR (or SIBOR, EURIBOR, HIBOR, BKBM etc). Please contact me and we can work through these implications together. You can contact me here

IBOR Fallbacks and System Implications

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