"The minimum amount of time a contract can be swapped on a simple agreement is an hour, and our concern is that there will be a huge shortfall of skilled individuals to manage this impending problem."
Financial institutions whose products and services are linked to LIBOR face a shortfall of up to 250,000 skilled individuals to handle sensitive and complicated contract transitions, according to research by contingent resourcing firm Momenta Group.
Following the LIBOR scandal and consequent Wheatley Review of 2012 which concluded that the widely-used benchmark rate had been manipulated, the Bank of England and FCA signalled that banks must move away from using the London Interbank Offered Rate from 2021.
In its place will be Sonia, the Sterling Overnight Index Average, the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.
Market estimates suggest around $350 trillion worth of financial contracts are underpinned by LIBOR globally, including mortgages, and all contracts will need to be rebased from LIBOR to the new reference rate.
Momenta Group has now warned that banks are vastly underestimating the number of skilled staff required to handle remediation, stating that the time taken to remedy a simple individual contract will take at least an hour.
With an estimated $350 trillion loans potentially being affecting because of their indexing to LIBOR, the concern is the high number of contracts which need to be rewritten and accepted by all parties involved.
Momenta Group has to date been asked to specify between 8 – 10,000 skilled individuals at financial institutions across the UK, USA and Asia. These institutions vary from high street banks through to wealth and asset managers, and a small number of hedge funds.
Recent research from Duff & Phelps revealed that 65% of firms have not completed planning for the LIBOR transition on 31 December 2021.
Kevin Riches, board director at Momenta, commented: “To implement this gargantuan change globally, without a backlash, will require an enormous amount of human resourcing. The mechanics of implementation and rewriting documents will require specific skilled workforce which few financial institutions have at the ready, not least with the looming deadline for contract swaps.
“The scale of the problem for financial institutions is threefold in that they will need to employ all measures to avoid penalties by swapping contracts by deadline, secondly, avoiding a consumer backlash on the fairness of new rates given, and finally, having enough skilled staff – often with paralegal skills – to handle the vast amount of contract changeovers. The minimum amount of time a contract can be swapped on a simple agreement is an hour, and our concern is that there will be a huge shortfall of skilled individuals to manage this impending problem. LIBOR affects a far great number of credit agreements than many realise, not least from student loans to pensions, mortgages to credit card agreements.
“Wealth and asset managers who work on hurdle rates, equally, will have a tough time as their commissions become jeopardised.”