Welcome to the Transfer Pricing webinar! We are waiting for all the participants to join and we will get started shortly… Transfer Pricing webinar: (L)IBOR Transition and Intra-Group Financing – Transfer Pricing Aspects of an Unprecedented Transformation 25 August 2020 Introduction to Zoom How can you interact? Webinar support Eleonora Zelger Optimising your Zoom Master view • To optimize your view, you can toggle between Chat for technical difficulties speakers and slides by clicking on the button in the right top corner • If you have any technical difficulties or require assistance with Zoom, please write to Eleonora Zelger in the Chat box and she will try to help you as soon as possible On sound • Everyone is on mute by default in the beginning of the webinar • During the Q&A session at the end of the webinar, you can click on the Raise Hand icon on the bottom to let us know you would like to unmute yourself to comment/ ask questions Ask questions • You can use the “Q&A box” to ask your questions 3 Greetings and introductions 4 With you today T H O M A S H U G SALIM DAMJI Deputy Head Group Tax, Partner, Transfer Pricing Julius Bär Group and Value Chain Alignment at Deloitte Switzerland GEORGY GALUMOV P E T E R N O B S XAVIER TINGUELY Director, Treasury & Debt Director, Transfer Pricing Manager, Transfer Pricing Advisory at Deloitte and Value Chain Alignment and Value Chain Alignment Switzerland 5 at Deloitte Switzerland at Deloitte Switzerland Agenda 1 Greetings and introductions 4 2 Main aspects of the (L)IBOR transition 7 3 Overview of treasury and commercial considerations 15 4 Focus on key transfer pricing implications 18 5 Industry perspective 22 6 Q&A and closing 23 6 Main aspects of the (L)IBOR transition 7 What are (L)IBORs? (L)IBORs are benchmarks interest rate at which major global banks lend to one another in the international interbank market for short-term loans What are • Published on a daily base for tenors ranging from overnight to 12 months (L)IBORs • Calculated by averaging panel banks submissions • Include both the expected cost of lending funds and the interbank credit risk (i.e. they are quoted on an “unsecured” base) The major (L)IBORs are • LIBOR – London Interbank Offered Rate – published for USD, EUR, GPB, CHF and JPY / administered by ICE and regulated by the FCA Major (L)IBORs • Euribor – Euro Interbank Offered Rate – published for EUR / administered by EMMI • TIBOR – Tokyo Interbank Offered Rate – published for EUR / administered by EMMI There are (L)IBORs across other currencies, but the bulk of the volume leverages the above reference rates 8 Who uses (L)IBORs and what for? (L)IBORs are one of the most used benchmark globally, there is an estimated USD 350tn of financial products linked to (L)IBORs Who uses (L)IBORs • Main categories of products: Loans, Bonds (FRNs), Derivatives (e.g. IRS), Structured Products • All industries impacted: Banks, Asset Managers, Corporates, supranational entities They are broadly used across institutions • To price products; What are • As discounting factor to value assets (e.g. collateral); (L)IBORs used for • As benchmark performance; or • In treasury/risk processes/intercompany agreements (e.g. FTP) 9 Why change? In the aftermath of the 2007-08 financial crisis, it became apparent that these reference rates are inadequate due to their lack of robustness In 2017, the FCA announced that due to insufficient meaningful data to sustain the LIBOR rate, the benchmark will be Decline in liquidity discontinued at the end of 2021 By end of 2021, FCA will not Reluctance from Panel Banks to submit quotes compel banks to contribute to LIBOR Scandals related to alleged manipulations 10 The (L)IBOR transition will not be a simple rate replacement transition Three key changes leading to operational, structural and economic challenges that need to be addressed to avoid top- and bottom-line impact Key changes Current state Future state Impact • Same administrator (ICE) • Different administrators across • Reference rate different across across main currencies (EMMI the different currencies (e.g. different currencies, with likely Decentralised in case of EURIBOR) SIX for SARON, The Fed for different standards, leading to governance SOFR) operational challenges • Term rates published on a daily • Benchmarks are overnight rates • Absence of term rate with basis for 7 tenors (from potentially strong impact on • Plan for some currencies to Structural overnight to 12 months) pricing methodology publish term rates based on changes derivatives markets (OIS, • Clear communication internally futures) and toward clients to mitigate conduct risk • IBOR (and EURIBOR) published • Secured or unsecured • Transition with spread adjustment on an unsecured basis, i.e. depending on the currency required for CHF and USD inclusion of credit risk in values Economic • Transition likely with winners and changes loser 11 New benchmarks have been determined, but only exist for “overnight” Replacement rates are currently being defined by the different National Working Groups, decentralised governance leading to operational challenges LIBOR (today) USD EUR GBP CHF JPY Intercontinental Federal Reserve European Central Administrator Bank of England SIX Swiss Exchange Bank of Japan Exchange (ICE) Bank of New York Bank National Alternative WG on Risk-Free Study Group on WG on Sterling Risk- Working Group N.a. Reference Rates Reference Rates for NWG on CHF Risk-Free Reference Free Reference Rates (NWG) Committee (ARRC) the Euro Area Rates Benchmark LIBOR SOFR ESTER SONIA SARON TONAR (overnight only) No release date Planned, end-2021, Planned, Q1 2020, Planned, mid-2021, Term Rate Yes know, but probably Not recommended based on OIS likely based on OIS likely based on OIS based on OIS Secured / Unsecured Secured Unsecured Unsecured Secured Unsecured Unsecured 12 New reference rates will be structurally different, in particular SARON SARON will only be published as an overnight rate, structurally changing the way the market operates today – will price of products only be known at the end of the period? LIBOR SARON (Current environment) (Future environment) From the market O/N 1w 1m 2m 3m 6m 12m O/N Different options discussed at LIBOR fixing Continuously compounded the NWG (incl. forward-looking (Forward-looking) (Backward-looking) options) – see next slide Impact on Products Today 3m Toady 3m • LIBOR is published daily for 7 tenors, allowing to know • SARON only published on an overnight basis the pricing for a period at the beginning of the period Key • Period pricing only known at the end of the period by Considerations • Client does not have uncertainty during the period compounding the daily overnights rates • Client takes on market risk during the period 13 New reference rates will be economically different, in particular SARON and SOFR SARON/SOFR are quoted as secured rated (LIBOR is unsecured), there will therefore be a transition spread – depending on the period considered, the spread will be different SARON-LIBOR Spread (monthly average) 4 3.5 • LIBOR is quoted on an 3 unsecure base, while SARON/SOFR are on a 2.5 secured one 2 • This implies that there 1.5 is a credit risk spread 1 between the old and new benchmarks 0.5 • The spread between 0 SARON and LIBOR -0.5 tends to increase during periods of financial -1 turmoil (e.g. 2007- -1.5 2008), when credit risk is high Jul-01-2001 Jul-01-2002 Jul-01-2003 Jul-01-2004 Jul-01-2005 Jul-01-2006 Jul-01-2007 Jul-01-2008 Jul-01-2009 Jul-01-2010 Jul-01-2011 Jul-01-2012 Jul-01-2013 Jul-01-2014 Jul-01-2015 Jul-01-2016 Jul-01-2017 Jul-01-2018 Jul-01-2019 Jul-01-2020 Jan-01-2001 Jan-01-2002 Jan-01-2003 Jan-01-2004 Jan-01-2005 Jan-01-2006 Jan-01-2007 Jan-01-2008 Jan-01-2009 Jan-01-2010 Jan-01-2011 Jan-01-2012 Jan-01-2013 Jan-01-2014 Jan-01-2015 Jan-01-2016 Jan-01-2017 Jan-01-2018 Jan-01-2019 Jan-01-2020 LIBOR 3M (CHF) LIBOR ON (CHF) SARON 14 Overview of treasury and commercial considerations 15 What needs to be done before (L)IBOR is terminated by 2021 Focus on five key topics • Establishing the scenarios and assumptions • Prepare programme plan including activities, timings, resource, costs • Defining the scope, methodology, tooling and Technology and delivery risks • Gathering and analysing the inputs and data needed to complete the assessment Impact Analysis Solution Design Fallback Language Identify contracts with duration longer than 2021 Review contracts around trigger event, fallback rate and fallback spread Define tactical changes needed now for existing products FX / IR program Identify implications to FX / IR hedging program Define long-term strategy Identify hedge accounting of interest rate cash Review possibilities of applying IFRS 9 and IAS 39 relief from the effects Accounting flows and instrument valuation techniques based of (L)IBOR reform on prospective assessment on (L)IBOR Review impacts from changes in FV as well as Define measures to avoid changes to financial instruments which could Taxes transfer pricing agreements incl. LIBOR trigger tax events references Identifying systems using (L)IBOR (e.g. yield IT Infrastructure Define program architecture and capabilities versus requirements curves) 16 What can be done in addition during (L)IBOR transition Focus on optimisation of IC loan portfolio and FX translation P&L impact minimisation Analysis of FX P&L Impact . Detailed analysis of current IC loan portfolio on FX p&l impact . Analyse local and consolidated impact • Besides (L)IBOR aspects Prove IC loan translation impact minimisation focus on FX translation Prepare to group IC loan portfolio to define impacts on local and group (consolidation) Redesign IC Loan portfolio level • Use contractual .