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Leaving LIBOR - Tackling a CLO challenge with technology-driven solutions

17 May 2021

With most benchmark LIBOR settings scheduled to disappear at the end of the year, the financial industry is working against the clock to transition their products to alternative reference rates and revamp their systems.

Anecdotal evidence suggests that the majority of financial institutions do not yet have a comprehensive plan in place for the looming LIBOR transition. Those that have catalogued their LIBOR exposure are often unsure of next steps and unclear on whether they are on track to meet the transition deadline.

For the CLO industry, the transition away from LIBOR adds another challenge to a complex market already facing tighter reporting demands and a spike in asset restructurings, resets and refinancings.

These issues were front and center at a recent Loan Syndications and Trading Association webinar to discuss CLO compliance operational priorities for the year. Moderated by IHS Markit's Head of CLO Compliance Analytics, Mark Bennett, the expert panel also included Tracey Luttenegger, CLO Compliance Product Manager at IHS Markit, and executives from several global asset managers.

During the session, participants homed in on several key technological aspects that will help market players navigate the LIBOR transition and the post-LIBOR environment.

Know your risks

The formation of a fully represented LIBOR committee is crucial in managing the transition, participants agreed. The impact of LIBOR association on CLO stretches far beyond the legal language in indentures and contracts. As one participant—the managing director of a global alternative asset manager—pointed out, the change is "going to affect every function within the firm," including technology. As such, IT stakeholders need to be involved to ensure that systems have the capability to process new benchmarks.

More broadly, it is critical to know the full extent of your risks—that is, understanding exactly how and where LIBOR data moves into and out of your firm, as well as how it reaches downstream recipients like custodians and trustees. One loan operations manager likened the process to pulling at the thread of a sweater: once you start pulling, the full range of systems and calculations that are impacted by the transition start to emerge.

In other words, moving away from LIBOR is an incredibly complex process; one that requires planning and collaboration both internally and externally to ensure system readiness for market participants, service providers and investors.

Automate key operations

The CLO market in the past few years has made significant strides in embracing newer technologies, particularly cloud-based technology. While some firms were once hesitant to store their data externally, they have grown more comfortable with the technology in recent years and have benefited from improved performance and less complex IT and infrastructure requirements, which has helped lead to lower cost models and better scalability.

Still, there is much more the market can do, participants agreed. Greater incorporation of automation and data transparency technologies would greatly help to support the impending LIBOR transition, as well as help firms to cope more broadly with ever increasing demands.

Firms are managing more funds than they once did, conducting more allocations and trading within those funds, while at the same time facing tighter reporting timeframes. As such, it is imperative to bring automation through the entire processing system, one participant noted. Clients also are seeking new technologies to support greater workflow efficiencies, improved data transparency and quicker deal modeling.

Lean on your vendors

Panelists stressed the vital role that vendors play in the transition and the need to have close relationships with service providers. Market operators are leaning heavily on external vendors to help manage the substantial changes to underlying applications. This being the case, it is important to collaborate with vendor partners to ensure that they are aware of the deadlines and deliverables for LIBOR readiness and ready to meet them.

Vendors, meanwhile, are already responding to new market demands. As one panelist noted, the days of having yearly or multi-yearly release cycles are over. Most vendors already have shifted to smaller deliverables released with greater frequency and with less time-consuming testing requirements.

Overall, the challenge of the LIBOR transition is substantial, and may even seem daunting for some. But participants noted that with proper planning and a thoughtful and careful approach, the CLO market will emerge unscathed and primed for future growth.

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.


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