Global Financial Institutions Coverage

2 0 UPDATE KEY INTERNAL PROCESSES AND SYSTEMS The landscape of LIBOR exposures and dependencies for corporates is vast. LIBOR can be referenced in bank loans and other financing arrangements, as well as in inter-company transactions, supplier agreements and even employee benefit plans that invest in LIBOR products. Corporates should not underestimate the operational work that is needed to prepare for using SOFR (or other alternative reference rates) across the diverse array of products and counterparties. As a starting point, it is necessary to identify all internal systems and key vendor relationships with LIBOR dependencies. This will necessarily require marshaling input from representatives of relevant areas (e.g., treasury, legal, procurement) within the organization. Outside resources also may be helpful in identifying which models or reporting processes are affected. In addition, the ARRC's informational document, titled "Internal Systems & Processes: Transition Aid for SOFR Adoption" (July 8, 2020), should be referenced, as it identifies many common LIBOR-related dependencies that could influence the timing and sequence of market participants' transition activities. After a comprehensive inventory has been taken, corporates need to convert those processes and systems to reflect SOFR or other alternative reference rates. Although every company will approach this task uniquely, there are two major groupings that corporates should prioritize: treasury processes and treasury infrastructure. Treasury Processes Corporate treasurers will need to address a number of treasury processes, including those relating to: • Funding and investment management – The transition away from LIBOR will affect the cost of funding as well as the valuation of loans, derivatives and swaps. Corporate treasurers will need to ensure robust modeling is performed to understand potential effects on the company. From an asset management perspective, particularly for those corporates with surplus funding and investments, the transition away from LIBOR may impact asset performance and the measuring of net asset value. • Interest rate and currency risk management – Corporates should make changes in their interest rate profiles as alternative reference rates are incorporated into financing arrangements. Modeling will also need to be adjusted to reflect the limited historical information tied to RFRs (which, unlike IBORs, are backward-looking) and other alternative reference rates. For those corporates with significant cross-currency exposures, planning will need to account for differing transition timelines across jurisdictions and possibly for a temporary multi-rate scenario in which IBOR-based and other rate-based products co-exist across different currencies. • Cash and working capital management – Corporate treasurers should understand the differences between credit rates and term rates and determine when term rates are preferable for specific cash management, liquidity and cash flow scenarios. Treasury Infrastructure Corporate treasurers will need to ensure the conversion of treasury and IT systems relating to, among other areas: • Hedge Accounting – Corporate treasurers need to examine how existing hedge accounting designations may be impacted by the transition. Compliance with applicable FASB relief, including the retention of any necessary documentation regarding accounting elections, must be monitored. • Financial Reporting and Payments – Adequate resources must be deployed to address reporting, payments and other accounting issues that could arise from transitioning to alternative reference rates. Corporate treasurers will be on the front lines for these issues. • Cashflow Forecasting – Internal models, calculations and forecasting tools will need to be modified to reflect alternative reference rates. LIBOR may be used by corporates in several places, including when calculating late payment penalties in contracts with customers or service providers. 0 4 | P L A N O N H O W B E S T TO C O N V E R T S Y S T E M S A N D A M E N D L E G AC Y C O N T R AC T S

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