De drijfveren achter de totstandkoming van rentetarieven. Een geopolitieke blik

Drivers of the formation of interest rates. A geopolitical perspective

Since the 1990's and increasingly since the 2008 financial crisis there has been a shift from funding of investments through the moneymarket between banks to financing using financial collateral. This shift has rendered the London Interbank Offered Rate, LIBOR, obsolete. This benchmark for interest rates dominates the loans and derivatives markets yet by the end of 2021 alternative interest rates benchmarks will be introduced, reflecting the shift from funding to financing using financial instruments as collateral.

In the money and capital markets government bonds are widely used as collateral for the financing of assets and investments. Central banks are forced to be the buyer of last resort of this important financial collateral. Monetary policy and fiscal policy go hand in hand together, to the effect that financial markets are increasingly subject to (geo)politics and its risks. Econometric models will not be able to pick up on this risk. Pension funds and insurers may use scenario planning to mitigate the geopolitical risk imposed on the financial markets. This is an important tool of risk management that is used by more and more companies. Scenaro planning gives insight, but developing scenarios for risk management purposes requires experience. Geotrendlines is able to assist you to learn how to create these scenarios.

Introductie op de IBOR-transitie

Introduction to the IBOR transition

The  London Interbank Offered Rate, LIBOR, was created in 1969 as a solution by a syndicate of banks granting a loan to the Middle East to mitigate the risk of low interest rate margins to the banks in case of rising interest rates. Rather than haggling on the interest rate each bank used, syndicate member banks quoted their interst rates periodically to each other. The average interest rate of those quotes became the LIBOR benchmark. LIBOR was used more and more. In the 1980's interest rates swaps were based on the LIBOR benchmark. Thanks to these contracts LIBOR was swapped for fixed interst rates, enabling investors to hedge against a rise or fall of interst rates.

In the Netherlands pension funds were forced to use interest rate swaps with the introduction of the Financial Frame Work Regulation which stated that pension funds' obligations must be valued using the euro swap interest rate. The fixed rate is swapped for the 6 month Euribor interest rate.

Pension funds and insurance companies use interest rate swaps to hedge against declining interest rates. When interest rates fall, their monetary obligations become more expensive which they wish to avoid. For these interest rate swaps the EONIA interst rate bench mark is used. Pension funds use LIBOR for their mandatory swaps, and EONIA for hedging and risk management purposes.

Since 2007 it has become clear that the LIBOR interest rate benchmark had been manipulated by bankers, resulting in regulation of interest rate benchmarks. The Financial Conduct Authority in the United Kingdom has announced that it will stop requiring banks to report the transactions that are used to calculate LIBOR, which leads to the creation of alternative reference interest rates benchmarks. The transition from LIBOR to these alternative reference rates is the topic of this seminar today. It impacts the carrying out of pension plans, contracts, IT systems and investment management activities of pension funds and insurance companies.

IBOR-transitie bij pensioenfondsen, verzekeraars en vermogensbeheerders

IBOR transition and issues for pension funds and insurers

According to Dutch supervisory authorities on financial institutions Dutch Central Bank and the Financial Markets Authority the transition from LIBOR to alternative reference rates may expose financial institutions to great risks if they do not adjust to the transition on time. Financial institutions were invited to assess the risks involved to get a view of the status of the adjustment to alternative reference rates.

For financial institutions that weren't invited by the supervisory authorities it is also important to assess the potential risks if the transition to the alternative reference rates is not managed properly. The transition impacts the value of financial instruments, existing and new contracts, risk management tools/models and systems and processes. It is recommended that an impact assessment is carried out.

IBOR-transitie: Risico's voor pensioenfondsen en verzekeraars, Casper Spiers

IBOR transition: risks for pension funds and insurers

The latest market developments of the LIBOR reforms are that the US and UK are moving towards the end of LIBOR as a bechmark interest rate by the end of 2021 whereas the end of EURIBOR is not yet considered by the markets.
BNP PAribas Securities Services supports your pension fund in the field of complex valuation issues, custody, risk assessments and reporting for supervisory purposes. Please watch our introduction video on You Tube HERE.

IBOR-transitie en fiduciair beheer

IBOR transisition and fiduciairy management

Achmea Investment Management provides insight to its fiduciairy clients which of their portfolios may be exposed to risks connected to the IBOR transition with a view of mitigating those risks using various activities.

Such activities entail participating to formal consultations on the preferred fallbacks for the IBOR benchmarks, assisting clients with the adjusting of legal documents, checking of potential valuation changes as a result to the application of alternative reference rates, and advising clients to switch to alternative reference rates early on.

Juridische gevolgen: contracten en legacy

The IBOR-transition is not yet a recurring item on the board meetings of many pension funds. It should, as the transition has got impact on risk management systems, investment management, organisational procedures, and, today's topic, legal agreements. We recommend that pension fund trustees set a policy to manage the transition. We are happy to assist you preparing such a policy.

The IBOR transition applies to derivatives contracts, for which the ISDA has got standard industry agreements in place which will reflect the transition. We recommend that pension funds screen all their legal agreements on references made to IBOR and EURIBOR as the agreements need to be adjusted, either bilaterally or, as in the case of ISDA agreements, per a standard amendment. It is important to check the agreements and think of the best policy adjust to the IBOR transition. Allen & Overy has got the expertise to assist you with this important task.