Alfa, a provider of software and services to the asset finance industry, has published an online paper that examines the challenges for auto and equipment finance providers as the sector transitions away from Libor.

The London Interbank Offered Rate, or Libor, is used as a benchmark to determine customer interest rates used by auto and equipment finance businesses globally. In the UK, the City regulator has set an end-2021 timeframe for phasing out the use of Libor in sterling-denominated contracts.

However, Libor, Euribor and other such rates carry inherent shortcomings which have led to their forthcoming replacement by alternative risk-free rates such as the Bank of England’s Sonia (Sterling Overnight Index Average) and Sofr (Secured Overnight Financing Rate).

Alfa & Libor

In the White Paper, entitled Libor Reform: The Impact for Auto and Equipment Finance Providers, Alfa discusses why this is happening, what it means for finance providers who need to make the transition, and how their systems must be enhanced to accommodate the changes.

Joe MacFarlane, the paper’s author, said: “The upcoming reform of Libor and other similar rates will impact asset finance systems on a global scale, and providers who wish to continue to link their business to money market rates need to consider how they will adopt the new risk-free rates.

“As the advantages of these rates become clear to customers, those who show a clear path to offering such linked business will gain an important competitive advantage.

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“Alfa Systems, Alfa’s flagship software platform, was already capable of addressing many of the requirements before the Libor transition became a reality.

“We have been working with the Alfa User Group to implement a solution that is consistent with the usage of risk-free rates across other lines of business, and allows a smooth transition for existing business at scale.”

The Financial Conduct Authority has said that firms cannot rely on Libor being published after the end of 2021 and this should remain the target date for all firms to meet – the coronavirus pandemic notwithstanding.

Alfa, a trademark of Alfa Financial Software, said it will publish updates to its paper as matters develop.

Credit crunch 2008

After the financial crisis of 2008, Libor was discredited when regulators in the US and the UK found traders had manipulated it to make a profit, but efforts to replace it have proven difficult with industry concerns that, if mishandled, it could trigger credit market confusion, particularly given the sums involved, currently it is used globally to price financial contracts worth around US$400 trillion.