THE National Association of Corporate Treasurers’ (NACT) summer conference in New York opened this year with a briefing from PwC on interest rates and other regulatory reform.
It was my pleasure to join Tom Deas, Chairman, and NACT members at the conference for the interesting programme which included a full ‘open morning’ session with only corporate treasurers.
But, back to regulatory reforms – Tom introduced the session and gave an overview of his involvement so far in terms of consultation. He has been there from the beginning, and the NACT is one of 27 financial organisations continuing the work in the US.
Peter Frank, PwC, introduced the agenda, Global LIBOR replacement; US tax reform; Dodd-Frank rollback and European GDPR. He gave the background to LIBOR replacement, referencing the FCA no longer compelling banks to submit rates past 2021, and gave a ‘world tour’ of global efforts to find alternatives. LIBOR replacement in the US takes the form of the Secured Overnight Financing Rate (SOFR) benchmark, which is based on ‘bundles’ of transaction dates in the repo market – over $700 billion in daily transactions. With regards to the Alternative Reference Rate Committee (ARRC), Peter touched on the challenges of legacy contracts that reference LIBOR and the risk that loan document default alternatives like Prime Rate suggest an increase in borrowing costs.
What corporates should be doing is…
- identifying exposures and contracts that currently reference LIBOR
- assessing effectiveness of existing hedges
- planning for challenges to future contracts
- addressing systems, processes and controls, administration and documentation
…and not forgetting intercompany transactions!
In 2019, or early 2020, we will start to see a likely gradual transition, dependent on the position of the organisation. The right fallback language needs to be used. Tom Deas stated: “going from a six-month unsecured rate to an overnight secured rate is a challenge and we don’t know the answer yet. The spread might need to be set higher, as a secured base rate is likely to be lower than an unsecured one, but it is likely that this will be challenged during negotiations”.
Tom invited me to give an ACT update. I highlighted the various working groups and meetings we have been involved in with regards to SONIA, (the alternative to GBP LIBOR) and the support our corporate treasurers such as Neil Wadey, Group Treasurer of British American Tobacco (BAT), have been giving. I highlighted the huge issue of one part of the world going for a secured rate and another for unsecured. The real economy does not have such artificial distinctions and this means even further complexity for corporate treasurers. One member asked “why don’t we just stick with LIBOR?”, to which Tom responded: “I’m in acceptance mode” – which makes me think about our other huge challenge, Brexit; do we do our best to plan for it, or put our heads in the sand and wait until the lights go out? With 5 minutes to go, Peter summed up elements of the US tax reform, Dodd-Frank rollback and GDPR and we moved on to our open morning session with plenty to think about!
Read the full conference programme here.