Factsheet The transition from LIBOR to ARRs will take Transitioning from LIBOR to alternative place in stages up to 2021. New financial products referencing ARRs have already reference rates in Fusion Sophis been issued in the UK and US, including for futures, floating rate notes, and swaps. As the rates are new, the adoption and the The investment industry must prepare for the shift from LIBOR to alternative liquidity of products that reference them reference rates such as SOFR. This factsheet updates you on the transition remains under development. and explains how Fusion Sophis supports the new rates. However, to ensure a smooth transaction from LIBOR to ARRs, many issues remain to be clarified by authorities, for example: • Adoption of ARRs and liquidity for With LIBOR due to Alternative reference rates (ARRs) for five key currencies each currency across many interest be phased out by ARR €STER TONA SARON SONIA SOFR rate products 2021, alternative Name Euro short Tokyo Swiss Average Sterling Secured • Adjustment of ARRs to a term rate: reference rates are term rate Overnight Rate Overnight Overnight Overnight LIBORs are term rates on seven tenors, being developed Average Rate Index Average Financing Rate while ARRs are daily rates. The impact to replace this Currency EUR JPY CHF GBP USD on derivatives, especially options, needs benchmark, which Old LIBOR EONIA JPY-LIBOR CHF-LIBOR GBP-LIBOR US-FEDF to be scrutinized. underpins many EURIBOR JPY-TIBOR US-LIBOR • Managing outstanding positions that loans, mortgages, Publication T+1 T+1 Real-time T+1 T+1 reference LIBOR and are not closed bonds and interest Existing None Futures Future, swaps Futures, Futures, FRN, by 2022 rate derivatives. products swaps, FRN swaps • Fallback provisions that specify contract Status Publication Reform in Reform in Reform in Publication terms where LIBOR is unavailable from October development development development from April 2019 2018 1 Finastra Fusion Sophis LIBOR Factsheet Adoption of the new risk-free rate timeline Fusion Sophis – capabilities and milestones Jul 2018 for LIBOR transition LCH began clearing FY 2021 Apr 2018 SOFR swaps Nov 2019 LIBOR may cease New York Fed/OFR to be produced ISDA publishes results began publishing SOFR; of consultation on Forward-looking Oct 2018 Capabilities: how Fusion Sophis can help Alternative reference rates setup BoE implemented final parameters for SOFR term reference CME: clearing of SOFR • Flexible operating model for supporting • Analysis of existing curves setup SONIA reform benchmark fallback rate expected swaps the new rate conventions in terms of • Configure the multi-curve and OIS ICE launched SOFR futures position- keeping, trading workflow and discounting framework if required May 2018 FASB approved SOFR OIS Oct 2019 Jan 2020 product lifecycle management • Configure alternative reference rate CME launched as a benchmark rate for €STR is published CME launched curves for all impacted currencies SOFR futures hedge accounting as new EONIA SOFR Options • Support for ARR products to integrate • Configure processes snapping rate new products in the system fixings Validate (calibrate) the new curves • Flexible curve framework that supports • Update the curves assignment selector pricing with both the LIBOR curve and to default to the new curves new ARR curve during the transition, and • Train your teams in the use of the new 2018 2019 2020 2021 allows for OIS discounting or new ARR curves framework discounting for different products Business impact management • Simulation tools for better understanding Finastra solution architects are available risk before and after the transition to help you assess and manage the impact • Full audit of history of the trading book of the LIBOR replacement in all business Sep–Dec 2018 Jan 2019 H2 2020 and market data to backdate your book processes that are supported by your ARRC issued consultations on fallback Consumer Product LCH to move to SOFR with confidence after the transition Fusion Sophis implementation: language for FRNs, syndicated loans, Working Group launched PAI/discounting on both bilateral loans, securitizations new and legacy swaps • User-definable P&L attribution with • Referential (bond, collateral agreement, granularity to explain the P&L change swap, rate derivatives) with new T+1 publication conventions Jul 2018 H1 2019 • Pricing, P&L and NAV and P&L and risk change before and • Operations and fallback strategy ARRC issued guiding ARRC released final recommendations for robust principles for fallback contract language in FRNs, syndicated loans after the transition • Risk scenarios, VAR and stress tests contract language ARRC released a paper to explain how market • Performance attribution participants can use SOFR in cash products Support available from Finastra Services • Cash and collateral management Our service team will assist in all the stages Source: ARRC (Alternative Reference Rates Committee) “SOFR: A Year in review”, enhanced with updates on SONIA, €STR of your transition from helping you assess and manage business impact, to adopting alternative reference rates to Alternative Reference Rates in Fusion Sophis. 2 Finastra Fusion Sophis LIBOR Factsheet Fusion Sophis: full details of enhancements to support the LIBOR transition The existing Fusion Sophis solution can Enhancements to support the LIBOR evolves and after the transition. With the • Prepare fallback language already manage several aspects of ARRs transition include: coexistence of “old” and “new” LIBOR Fallback language is under preparation to • Daily rate products: it can define ARRs • Daily compound rate derivatives rates in the market, multi-curve and trigger the event “Switch LIBOR to a new and use them in different contracts, The new listed products referencing ARRs OIS curve management is necessary. rate”. There is as yet no market consensus including trading products (bonds, take into account that ARRs are overnight Fusion Sophis integrates the new market yet on how to replace the LIBOR rate in swaps), collateral, cash funding, etc. rates not term rates like IBORs. The term products and provides a flexible way to all existing contracts, whether traded • “Forecast” flexibility to manage the ARR rates in old LIBOR futures contracts are manage the curves: contracts or credit agreements. We think fixing process on the next day replaced by the daily rates compounded - €STR curve construction based on that there are two possible scenarios: • Portfolio valuation and P&L explanation during a period. Furthermore, instead the current EONIA curve - Renegotiate the contract, close the (from v7.2) with the last fixing due to the of only one fixing rate in the old LIBOR - New daily 1M / 3M (SOFR) future for existing position and open a new ARRs’ publication lag contract, multiple fixings are used in the short term-curve calibration position with an ARR • Powerful P&L explanation tool enables the new contract. Fusion Sophis supports: - Directly replace the rate in the existing • Pricing and lifecycle management user to evaluate the P&L and risk impact - New SOFR, SONIA, SARON futures contract with a premium on the trade with new conventions with the transition - Different daily compounded methods (defined by the regulator or negotiated Unlike LIBOR, most of the new ARRs are • OIS discounting and multi-curve framework on 1M and 3M maturity with counterparties) published one day after their effective (from v7.1.3) allows valuation under the New volatility derivatives are currently We are planning to develop a portfolio date. Valuation and workflow on the rate new ARR and LIBOR curves simultaneously developing in the market, including IR simulation and migration tool which should be therefore changed. New market futures, options and swaptions. We will enables P&L analysis before the transition conventions have also been developed to continue to improve current system and eases the transition of portfolios. incorporate the daily fixing. Fusion Sophis coverage to incorporate new products has made enhancements on: and market data conventions. - Non-business day convention for SOFR- • Interest rate curve management referenced bonds New products are used in interest rate - Lookback and lockout period curve calibration – SOFR futures are used management for the new ARR bonds in the calibration of the SOFR curve as (SOFR/SONIA/SARON) they are the most liquid products trading - Managing the one-day publication lag in the market for the short to medium with T+1 with adjustment in pricing and term. For other ARR curves, the approach improvement of performance on daily is different and will change as the market compound valuation 3 Finastra Fusion Sophis LIBOR Factsheet What’s next? Fusion Sophis milestones Much has been already done in global markets to identify alternative reference 7.1. 3 7. 2 7.2.2 7. 4 Now 7. 5 rates and raise awareness among different market players. However, there is still more Foundation for new ARR rate P&L explanation for the new Pricing simulation with Support for new LIBOR Full support for new LIBOR to do to construct transition plans across all support with accurate pricing LIBOR fixings and the ability different yield curves products (as at 2019) products and migration asset classes and currencies. for the transition to historize your book before (pending market decisions) • Multi-flavor analytics • New alternative reference and after transition For Fusion Sophis, we will closely monitor • OIS discounting and multi- rate futures curve framework