In his opening speech, the renowned expert in derivatives and risk at the University of Toronto made it clear which were the challenges that the industry is facing in the transition between LIBOR and Risk Free Rates (RFR) and how the markets are still defining which rate will be used: whether continuing with long-term interest rates or getting used to operate with default rates.

With an important attendance, VMetrix Group INC – provider of Worldclass technology solutions for investment portfolio transactional lifecycle management for the global financial industry – presented its first online conference series “Financial Challenge 2022”, with the remarkable presentation of Dr. John C. Hull, Professor of Derivatives and Risk Management at Maple Financial Group at the Joseph L. Rotman School of Management at the University of Toronto. 

The first webinar, called “The LIBOR phase out”, was held on May 11th and was hosted by Sebastián Valenzuela, VMetrix’ CEO and founder, Luis Cisneros, Risks Financial Lead of VMetrix and Javiera Quiroga, financial journalist and moderator of this event.  

In the opening remarks, Sebastián Valenzuela pointed out that the moment the market is facing is unique, since many industries have evolved and improved, including the financial area, which has been able to deliver innovative proposals such as new payment methods and products, but has also seen the irruption of Fintechs and along with it, important transformations in the regulatory area.  

“Today’s VMETRIX is a Game Changer, which aims to change the paradigm of the way financial assets are managed nowadays, providing a world-class system for the transactional management of investment portfolios in service mode”, therefore, as he stated, the company wants to contribute in the discussion and understanding of these new processes. 

Aiming to be a forum for experts and spokespersons of financial and technological development in the region, the masterclass given by Dr. Hull – for the first time available to regional markets – was a thorough review of LIBOR, its evolution, how it is coming to an end, which are the rates that are replacing it (Risk Free Rates) and how all the players are addressing this challenge. 

In this regard, after the 2012 scandal triggered by some London-based banks -Lloyds, Barclays and Royal Bank of Scotland- that were charged of manipulating the LIBOR and subsequently forced by the British regulator to pay millions of dollars in fines, the international financial market made a priority to have new and more accurate indicators that provide a more representative and realistic methodology to establish the price of financial instruments, such as derivatives and futures. 

These changes were particularly significant for regional markets, whose regulatory authorities have already acknowledged the end of LIBOR and instructed banking institutions to use the so-called “Risk-Free Rates” (RFR) as a reference index. However, they have admitted that the industry will be confronted with a number of operational, technological and commercial hurdles that need to be considered and understood. 

“One of the main differences between LIBOR and the new SOFR, SONIA, ESTER, TONAR and SARON (substitute rates chosen by regulators that are overnight rates calculated from actual transactions in major currencies), is that the former was known in advance, while the new RFRs are known in delay,” emphasized the University of Toronto academic, adding that “LIBOR incorporates some credit risk, while SOFR and its equivalents are essentially risk-free”. 

According to Dr. Hull, financial institutions’ main challenge lies in changing the contractual terms and documentation required to move from one benchmark rate to another. “It will be a slightly slower process than expected, but it is estimated that by mid-2023 it will be simplified. There is no doubt that regulators are making every effort to make it happen,” he said. 

According to the expert, the reason for regulators to choose overnight indexes is precisely because of the large volume of actual transactions taking as a basis for these rates, compared to the number of transactions that were initially used as a basis for LIBOR quotations. “The key issue is that we don’t know the precise rate we will pay until the end of the period. Thus, if we accept the daily rate as a replacement for hundreds of billions of dollars in transactions, we will have to get used to thinking about forward interest rather than upfront interest,” he concluded in his analysis of both options. 

Asset management software: in the market’s spotlight 

One of the issues that the financial industry is analyzing in this transition process is how technology development Fintechs are incorporating the transition and solving the functional and technical aspects associated with the platform that manages the investment portfolio. 

“In the case of institutions, this is a very important transition process since they have many derivative contracts within their system, most of them legacy”, emphasizes Sebastián Valenzuela, VMetrix CEO, who adds that this is a reality already known to the company, since SOFR implementations to replace LIBOR have already been carried out and are currently in the production stage with two important banking clients both in Chile and in Mexico.  

This premise explained by Sebastián Valenzuela is supported by Dr. Hull, who affirmed during the conversation with the panel that “The end of LIBOR not only impacts the financial market, but also the software providers and how their solutions are taking care of incorporating these new rates nowadays, without affecting the final customer. I think VMetrix is on the right track in that regard” he stated. 

The company is preparing the launch of what will be the first and only SaaS (Software as a Service) solution for asset and investment portfolio management, that will provide all kind of organizations an access to the metrics and indexes that operate in the global market.  

“In relation to SOFR integration, our solution will provide a simple and direct approach: our clients will log into a platform that already includes the risk curves, and with the guarantee that each update will provide access to additional indexes to strengthen and maximize the success of their operations”, emphasizes Sebastián Valenzuela. 

In the second webinar, “The impact of machine learning on finance“, to be held on August 24th, we will introduce the insights of Dr. John C. Hull regarding the advance of digital transformation for the financial market, which is the core subject of his latest book “Machine Learning in Business: An Introduction to the World of Data Science”. 

We invite you to review the entire broadcast of the masterclass “The LIBOR phase out”, featuring an interesting discussion on the impact that this regulation changes will have, on our YouTube channel, by clicking here (link to YouTube). 

For information on the following online events, go to https://events.vmetrix.com