Alternative Benchmarks for a New Normal

To better understand the impact of the LIBOR transition and the financial implications for Japan and the Asia-Pacific region, Celent continues to conduct online surveys and interviews targeting financial institutions and IT vendors. This report features an analysis of LIBOR transition readiness in Japan-based on a survey titled Navigating the LIBOR Transition: Using IT to Adapt to the New Normal conducted in the fall of 2020, which sheds light on the necessary preparations and potential challenges institutions must consider in light of this upcoming change.

Once referred to as the world’s most important number, The London Interbank Offered Rate (LIBOR) is the most prominent global benchmark for interest rates and is referenced in setting the prices of derivatives, bonds, business loans, and consumer financial products. The LIBOR figure has played a crucial role in the financial ecosystem, serving as the reference rate for more than USD240 trillion in financial products.

A series of problems with LIBOR prompted world regulatory authorities to announce that they will phase-out of the reference rate, setting industry players on the move to identify alternative rates and formulate new processes. Alternative benchmarks will, by definition, be structurally different from LIBOR. How this will affect existing products that reference LIBOR and what new products may appear remains unknown. How the potentially significant impact on both customers and the macroeconomy will play out is similarly uncertain.

Although not the end goal, this transition in 2021 will cause financial markets to undergo a major change. While 2021 is just beginning, Japanese financial institutions should already be pulling out all the stops to successfully tackle the transition, considering the scale of the migration required and the impact on financial markets.