The Center for Financial Professionals conducted extensive research ahead of the highly anticipated 8th Annual Risk Americas Convention, drawing upon industry expertise with the Blu Ribbon Advisory Board, and conducting one on one interviews with 60+ industry experts to gain an understanding of what lies ahead.

The research was divided into 4 main subject groups; Market trends, innovation in risk management, model risk management and operational risk.

The first portion of this report looks into IBOR changes and the move to phase out referencing of IBOR and transition to a new rate. Although the discontinuation of use of IBORs presses ahead, what the final rate looks like globally remains uncertain as disparities emerge in alternatives. IBORs are used industry wide, but a series of mis demeanors have brought about the demise for future use, with its reputation fundamentally damaged after banks manipulated rates. This change looks to impact the industry fundamentally and pose a series of challenges for financial institutions. Firstly, current contracts and transactions are indexed under current IBORs, legacy contracts in place make transitioning by 2021 a major challenge. The New York Federal Reserve began publishing the Secured Overnight Financing Rate (SOFR) as an alternative rate to back US derivatives and loans, minimizing reliance on LIBOR, however it is estimated $350 trillion in securities are still underpinned by LIBOR globally making the transition one of the biggest challenges facing the industry today. The transition to an overnight secured rate requires a lot of change in the market, including modeling a term structure with varying maturities to reflect interest rates of the future. It is clear that LIBOR will no longer be an accepted rate, but the future remains uncertain as to what the final rate looks like and how institutions can transition over.

Another large area of focus across financial institutions and markets was interest rate risk in the banking book and increasing interest rates. Many working in financial services now have not seen the impact of rising interest rates and therefore may not fully understand the risks to effectively manage the change. Many of the models used are using assumptions based on historical rates which have been mostly flat, impacting availability of empirical data to support assumptions. The industry must look to better prepare for rising interest rates and manage the gap. With the changes in interest rates comes the risk to the banking book with excessive levels of interest rate risk impacting earnings and capital base. Institutions must develop frameworks to identify, measure and monitor interest rate risk, ensuring oversight of risk appetite. Interest rate risk remains an uncertain risk, with the extent of the impact unknown and many not understanding fully how to manage and prepare for such risks.

Finally, another key area of focus is CECL; as we move closer to implementation the focus is shifting away from modeling requirements to the initial impact across the market. CECL looks to fundamentally overhaul how numbers are accounted, with losses recognized at origination of the loan rather than once incurred. The forward-looking nature of CECL makes a lot of the requirements a substantial challenge for institutions and understanding approaches to estimate losses and understanding changes in macro-economic variables. The initial day one impact of CECL remains unclear, though IFRS 9 has gone some way to reassure institutions that the impact may not be as severe as anticipated. Uncertainty remains as to treatment of long dated products with the potential for more substantial lifetime losses. Many are turning their attention to the impact on numbers and how these can then be explained to stake holders in the market. CECL has the potential to drastically impact reserve requirements for future losses and therefore drastically impact balance sheet numbers.

Overall the areas identified as key market trends carry a host of uncertainty and require forward looking and preparation in order to effectively manage future changes and impacts across the market. All have the potential to cause huge changes across the market and impact the way banks operate and viability of certain business lines.

The above any many more will be addressed at the upcoming 8th Annual Risk Americas Convention taking place in New York City on May 14-15. ClusterSeven will be exhibiting and speaking on a pan discussion “Increasing model transparency through clear and effective validation programs”.

Register for the event today with a 20% discount: RA-C7.

For more details on the event please visit our website at

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