How to Prepare Your Data for the LIBOR Transition to SOFR

For decades, the London Interbank Offered Rate (LIBOR) has been the world’s most widely used interest rate benchmark for mortgages, consumer loans, corporate debt, derivatives, and other financial instruments. In recent years however, the number of LIBOR transactions has declined, so the index has become less reliable and less credible.

Consequently, global regulators have signalled that firms should transition away from LIBOR to an alternative overnight risk-free rate (RFRs), such as the Secured Overnight Financing Rate (SOFR)—which is expected to succeed as the global benchmark rate in 2022.

“There’s no one-size-fits-all approach for closing out or converting existing LIBOR positions, so market participants need to get ahead of this issue,” John C. Williams, president and chief executive officer of the Federal Reserve Bank of New York, stated at last year's U.S. Treasury Market Conference. “I also strongly encourage market participants to address legacy LIBOR-linked contracts.

Transitioning from one rate to another is a highly complex task. In fact, a recent Pulse survey found that while 89% of fiserv IT executives say that transitioning contracts, systems, and software from LIBOR to SOFR is a priority, only 3% say they are prepared for the changeover.

Financial services organizations and banks have a huge task of moving tens of millions of contracts to SOFR by the end of 2021. Automating the task of discovering data related to LIBOR in contracts and other files is key to getting the job done in time for the transition.

In the survey, an impressive 80% of IT executives have digitized their contracts and are prepared for an automated search method. Even more notable is that 33% say they are using AI to find and change the contracts, ensuring a completely automated process thus freeing employees—who would have done the manual task—to continue growing the core business.

But, transitioning to SOFR is more complicated than finding and replacing language and interest calculations in contracts. More than 60% of participants said at least 15 applications need to be updated, which also requires rigorously testing to ensure minimal disruption to operations once the changes go live.

71% of IT executives said that updating online services, digital financial products, and  applications with the new benchmark rate is one of the biggest challenges they’ll face.

These can include:

• Core business systems software, such as Oracle EBS and SAP Capital markets software, such as Murex

• Online loan estimation tools

• Securities trading software

• Mortgage software platforms

• Real-time account & transaction processing software

• Financial product modeling software

• Customer self-service portals

• Online payment processing software

• Currency funds management software

• Mobile applications

Transitioning applications to SOFR relies on automating discovery of where LIBOR rules exist. Teams then need to update code and data, and test the changes.

Nearly 76% of banking and fiserv IT executives do not have a solution for easily accessing dev/test data to update and test their applications.

Another 95% predict that updating systems and applications will be disruptive to their core operations. Using a platform that combines API-driven data compliance and data delivery, financial services teams can easily provision and access application data that can be refreshed instantaneously. That means more tests can be run continuously throughout the development process using full, complete datasets. Thereby, developers and testers can update and test applications and fix production issues much faster, improving the productivity and efficiency of application teams.

It’s critical for businesses to adopt an automated way of discovering LIBOR information within applications and making data available continuously for testing applications once the updates are made. Otherwise, companies face costly IT downtime, which can lead to a chain reaction of events, including lost customers, decreased employee productivity, data failure, and ultimately lost revenue.

Check out the full survey results in this infographic and see how financial services and banking organizations are preparing for the LIBOR transition by 2021. You can also download an implementation checklist for SOFR adoption here.