First, we need to thank the European Central Bank (ECB) for its action earlier today. They have helped prove a point we have been making for quite some time.
Earlier this month, on July 7, we published a White Paper regarding LIBOR Reform. In that paper, we noted that the risk measurement and risk management challenges are both daunting and unique for a specific reason:
"The LIBOR transition is unique in recent history because policymakers are requiring market participants to shift towards standards that are not yet fully developed. Final regulatory and other policy specifications cannot be generated until sufficient time series data exists. Financial institutions and their corporate customers in particular must build nimble systems that can respond efficiently to shifts in public policy priorities for every jurisdiction that represented in their portfolios."
The European Central Bank today proved our point.
They just issued for consultation proposals regarding the optimal mechanisms for generating compounded €STR term rates.
Financial institutions and their corporate clients are being asked to transition to new pricing benchmark rates....without yet being able to estimate their risk exposures because term rates for leading benchmarks do not yet exist.
Our point in highlighting this situation is not to criticize the ECB....or the other central banks that are still creating the standards that will define risk pricing. Our point is that the risk management challenges created by the LIBOR transition are much larger than merely replacing "LIBOR" in contracts with the new local benchmark.
Moreover, the transition requires a far more sophisticated approach to monitoring public policy developments globally. Architectural and conceptual decisions made by one policymaker today will impact choices by other policymakers in the coming months. Crafting an appropriate risk management and risk pricing framework while standards are still under construction requires a much closer eye on public policy developments. And because the issues are both so technical and so central to how financial markets function, classic technology solutions that do not understand the difference between a collateralized or uncollateralized benchmark will have a hard time finding and illuminating critical inflection points.
We at BCMstrategy, Inc. can help with this challenge.
Please join us on July 29 at 10 am EST/1500 GMT for a webinar that will provide a more in-depth discussion of this and other risk management challenges raised by the LIBOR transition. Register today using THIS LINK.
BCMstrategy, Inc. is an early stage technology company bringing the data revolution to policy intelligence by quantifying global public policy activity daily. Individuals can access the PolicyScope Platform and the daily PolicyScope Risk Monitor through individual subscriptions. Please contact us for more information regarding enterprise-level deployments for teams and direct data delivery via API.