London-based fintech firm Finastra announced today the availability of Fusion LIBOR Transition Calculator, a service that enables banks to calculate Alternate Reference Rates (ARR) or Risk-Free Rates (RFR).
The calculator service works independently of Fusion Loan IQ, Finastra’s commercial lending solution, according to the firm. Built on FusionFabric.cloud, Finastra’s open innovation platform, the calculator’s open API facilitates the integration with systems that don’t yet have a solution in place for calculating ARR/RFR rates, thereby significantly reducing operational risk.
“There is no doubt the LIBOR transition is the biggest change the market has seen in lending over the last 20-30 years. The shift away from LIBOR has become even more concerning against a backdrop of economic disruption. The need for a flexible service that can expand over time is more important than ever,” said Robert Downs, senior principal product manager, corporate and syndicated Lending at Finastra. “This calculator will be expanded as ARR methodologies and conventions evolve, protecting our customers from risks associated with complex system changes and ultimately future-proofing their businesses.”
Finastra explained that the calculator service independently accesses the ARR/RFR from external official sources such as the Federal Reserve Bank of New York for SOFR. It then calculates compounded in arrears rates and daily non-cumulative compounded rates, along with corresponding interest accrual amounts for a set of inputs.
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Consistent and accurate results
Depending upon the rate method chosen, the calculator has the flexibility to calculate the daily compounding rates for the whole period or only for the end date. It follows Finastra’s Fusion Loan IQ ARR calculations, which gives market participants consistent and accurate results.
Peter Rothwell, partner at KPMG, said that the imminent transition away from LIBOR is creating significant challenges for banks and lenders.
“Legacy systems lack the ability to process ARR and RFR priced loans and implementing complex system changes can be costly. The ability to tap into a calculator using APIs will save a significant amount of investment and operational risk,” he said.
Fusion Loan IQ is Finastra’s solution for commercial lending, powering 71% of total syndicated loans around the world. It alleviates the high costs of system and process redundancy within commercial lending operations, as well as increasing transparency, improving risk management and simplifying entry into new markets or business lines. The latest version of the solution, enhanced to support ARR, became available at the end of 2019, providing banks with core capabilities to issue new loans using the replacement rates, allowing them to begin to transition their existing LIBOR portfolio safely.