Final for Libor

Most users of a TRM or CML system are probably affected by this: The changeover of reference interest rates in the course of the benchmark reform to rates in the overnight money area makes a number of adjustments in the modules necessary in order to be able to manage variable-rate securities, money market transactions or derivatives in the future as well. Moreover, as Libor rates will no longer be published from January 2022 onwards, with the exception of US dollar structures - where the transition period will be extended to June 2023 - time is pressing.

Provided that the corresponding contract amendment with the counterparty succeeds within the framework of the fallback clauses available in the market, existing transactions can still be adjusted without major changes in the system. All that needs to be done here is to adjust the interest rate conditions concerned and add the required fallback rates to the market data supply.

However, if financial transactions based on the new money market references are to be managed in your SAP systems, more extensive conversions are required. The previous version of SAP Financial Mathematics (FiMa) and the condition settings available to date for the product types concerned cannot correctly map the overnight rates used as benchmarks in the future, such as the SOFR for the US dollar or the Sonia for the British currency area, and must therefore be updated.

Unfortunately, this is only possible by importing numerous notes, whereby the actual number of notes depends on your system status. If you have already performed the migration to S/4 Hana for your TRM or CML module, the corresponding effort is significantly reduced. According to our project experience, for example, the update of an SAP TRM system on ERP 6.0 EhP 8 can be expected to take two to three days.

It should be noted that the notes and the associated changes so far only cover the main product types affected by the reference interest rate changeover: Bonds (040), Money Market Transactions (550/580) and Swaps (620) in SAP TRM and all product types in SAP CML (3*0). For ABS/MBS transactions (042), which are frequent in the US market, SAP has announced a corresponding solution in TRM for early fall 2021.

The next step is to activate the newly implemented functionalities, including the product types regarding FiMa and parallel conditions, as well as the field status control for the newly available input parameters. Once this has been completed, your SAP system is in principle able to fully process financial instruments with variable interest rate commitments in the overnight money area.

Go for it!

However, practical experience shows that extensive testing is still required before the conversions can go live. The extension of the TRM system just described provides a large number of new options for designing interest rate conditions, which in turn influence the payment flows of the mapped financial instrument.

Here, you must thoroughly check whether the cash flows generated in the SAP system also match the corresponding cash flows on the side of the respective counterparty - if this is not the case, there is a risk of constant discrepancies for each variable interest transaction in your system when reconciling incoming and outgoing payments.

In short: The abolition of Libor references requires an adjustment of your SAP modules, and this adjustment cannot be carried out without effort. Nevertheless, you should not shy away from the changeover, because the updates provided by SAP and their implementation can now be considered best practices. So go for it.