Arro Libor - Navigating the transition

The London Interbank Offered Rate (LIBOR) is the benchmark rate for more than USD 400 trillion worth of contracts ranging from complex derivatives to mortgages and credit card transactions.

Libor is being phased out by the end of 2021 and replaced by the Alternative Reference Rates.

LIBOR rates rely on a term structure as opposed to ARR which are overnight rates with an important implication : the value of the index at 6 months has to be determined using around 180 daily ARR fixings and can be computed only at this end of the interest period. a specific methodology is needed to compute the final value and allow the determination of the interest cash-flow at this end of the period.

Besides the complexity to manage ARR, the transition may lead to huge losses for the banks. ARR are risk free rates so they will be mechanically below the LIBOR equivalent rates, which are embedding a liquidity risk. A new client spread needs to be determined and used on the new converted ARR instruments.

ARRO is the solution to manage a smooth transition from LIBOR to ARR for both loan renegotiation and loan origination ensuring the profitability and economic equilibrium constraints are satisfied.
ARRO is a service  based on the cash-flow engine used as core component in our ALM/FTP/IFRS solution. This cash-flow engine is able to project the cash-flows from LIBOR and has been enhanced to comply with the new ARR requirements (average rate, lookback, lockout,…).
The business unit retrieves LIBOR loans from their portfolios using open APIs with the bank back office systems.
For each loan, ARRO will apply the algorithm to compute the additional ARR/LIBOR spread that equates the value of the ARR and the value of the LIBOR ensuring that the new converted ARR loan is still profitable to the bank.
For the origination, ARRO provides an interface for new ARR loans based on the same principle of profitability using FTP approach that allows the front officer/account manager to determine the breakeven spread and simulate various loan pricing scenarios with impact on the margin.

Technology :

• Angular
• NodeJS
• HTML 5

Open API: Fusion Essence/Equation - LoanIQ

FusionRisk ARC: on-demand ALM API