The race is on to replace the London Interbank Offered Rate (LIBOR), as just over two years remain before the deadline to institute a new reference rate for $200 trillion in dollar-denominated loans, bonds, and derivatives. However, the process by which financial institutions are navigating the transition remains largely hidden from view.

In order to understand the overall state of preparedness within the financial industry, SRS Acquiom, in conjunction with Debtwire, set out to shed light on the steps being taken by institutions readying themselves for the change. The two companies put together their findings in a new report, A New Standard: How Financial Institutions are Racing to Prepare for the LIBOR Transition, which is based on a survey of investment banks, direct lenders, distressed debt investors, hedge funds and business development companies directly affected by the impending end of LIBOR.

In perhaps the survey’s most critical finding, 46% of institutions admit they are not well prepared for the transition, despite the UK’s Financial Conduct Authority announcement two years ago saying it would no longer require banks to submit the data used to compile LIBOR as of the end of 2021. Moreover, 42% are not close to a concrete project plan to make the transition away from LIBOR.

According to a managing director at a New York-based distressed debt fund: “Things such as the compensation protocol, risk management and hedging activities are the main challenges, and they have increased due to the transition timing being unclear for many.”

Financial institutions still have some time left to make progress, but for legal, compliance and senior leadership teams already dealing with many other issues, time can move surprisingly fast. Given this, now is the time to act by accelerating transition plans. The report sets out seven necessary steps, and analyzes how much of the industry has taken each of them.

Key findings from the report included:

• 64% of respondents plan a full transition away from LIBOR by the end of 2020, with a significant percentage planning this for the first half of the year.
• Over a third (38%) of institutions have not begun the process of organizing a steering committee for the transition.
• More than six in ten institutions have responded to the uncertainty surrounding which benchmark will prevail in their segment of the financial markets by favoring the “amendment” approach in existing contracts, wherein the agent selects the successor rate subject to lender consent.

SRS Acquiom Loan Agency provides unbiased, independent, third-party loan agency services for thousands of complex credit agreements.

Part of the Acuris family, Debtwire provides high value news, data and analysis on debt markets worldwide.