LIBOR transition and conduct risk

Risk.Net published a new article on conduct risk related to LIBOR transition: Conduct risks stalk banks in Libor transition

The journalist called me for background information related to the transition, spread computation and  and the conduct risk in particular, even if I'm not explicitly quoted in the article.

Some extracts from the article:

"The protocol is not a panacea [for legacy trades]" (Sharon Freeman, Antevorta). This is basically what I said in my "Signing the ISDA fallback protocol: a cautionary tale" comment in the same Risk.Net.

If you have lawyers advising, ‘Get the protocol signed’, and you haven’t done the analysis to explain all the impacts to that client and neither have they, you could be heading towards litigation.
(Sharon Freeman). See my "Serious questions" about FCA warning! " As I wrote previously in a LinkedIn comment, I don't advise the derivative users to "lawyer up" but to "quant up" and have a precise understanding of all the valuation and risk management impacts.

"training thousands of front-office staff in recherché Libor topics – many of which are specific to particular transactions or relationships – will be a significant challenge." Don't hesitate to contact me for such training. I have been researching, implementing and training on related subjects for more than 2 years, having previously spent 10 years working on multi-curve and collateral framework, in particular on the meaning of LIBOR and collateral discounting.

"LIBOR discontinuation should not be used to move customers with continuing contracts to replacement rates that are expected to be higher than what LIBOR would have been, or otherwise introduce inferior terms." (FCA). The ISDA new fallback induce a priori an expectation for something different (if not there would be no need for a something new) and an a posteriorly different payment. Protocol is thus an "inferior term" for half of the trade sides. I cannot logically reconcile encouraging people to blindly sign the protocol and at the same time requiring no "inferior terms"; the FCA must be schizophrenic or have a different logic than me.

Our challenge, once the wording is agreed, is to maximise market adoption,” Graham adds. “You see the regulators encouraging people. It’s in the market’s interest for as many people as possible to adopt and accept it.” (UBS’s Graham). When one claims that the "challenge is to maximise market adoption", what goal does he have in mind? Is it to reduce operation/legal risk for banks and reputation for regulators or to have a fair transition? As long as the final goal is not clearly stated, it is not possible to chose the means to achieve it and to focus on a particular challenge.

"Robert Pickel, ex-Isda chief executive and now chair of the Prime Finance initiative, argues that acceptance of the protocol is the market’s best option. He cites the success of other Isda protocols over the years, noting that even protocols that don’t attract 100% adherence are still an effective mechanism – and quips that they provide a type of “herd immunity” for markets." The "immunity" referred to is probably against litigation risk, not against unfairness. We are back to the previous paragraph, what is our goal? Is it to protect financial institutions against lawsuits, achieve immunity for them, or to create a better world? Obviously the second option is more open-ended and maybe more difficult to achieve, but it has my personal preference.

The article focuses on the conduct risk coming from mis-selling the transition. One important conduct risk which is not mentioned is the conflict of interest in ISDA consultation outcomes and LIBOR panel. Spread has been basically selected by the respondents, the pre-cessation trigger date is selected by the FCA, announcement/cessations dates are selected by the LIBOR panel and IBA (see LIBOR Fallback and Quantitative Finance and LIBOR: Don't fallback, step forward for technical discussions), material non-public information was available to ISDA and some of its committee members. Knowing that those elements are the most important in term of value transfer, maybe something should be said about those.

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