The transition from Interbank Offered Rates (IBOR) to Alternative Risk-Free Rates (RFRs) has an impact on all financial and non-financial institutions operating with the impacted floating reference rates. It affects a wide range of financial instruments on the derivative and cash markets.
This blog edition highlights notable developments made publicly available by the global regulatory community, industry working groups and/or infrastructure providers over the month of December 2020. You will find more detail in our monthly EY IBOR Transition Newsletter, to which you may subscribe through the following link.
Now one year away from the transition, we are witnessing a growing awareness among market players as well as a multiplication of initiatives. The result is increasing clarity regarding the cessation of IBORs.
- Recently, the ICE Benchmark Administration Limited (IBA) published its consultation on its intention to cease the publication of LIBOR settings (open for feedback until January 25, 2021). After having received those feedbacks, the IBA will share the results of the consultation with the Financial Conduct Authority (FCA) and publish a statement summarizing the responses from the consultation.
- In the Swedish market, the Swedish Financial Benchmark Facility AB (SFBF) announced a reform process for the STIBOR benchmark after having finalized the review of STIBOR methodology. This review and analysis have shown a need for a reform to the methodology and potential clarification of the current definition of STIBOR. According to observers, those adjustments can be made to achieve a seamless transition without any impact to either the value or the volatility of the benchmark. SFBF will also launch a formal public consultation early in 2021.
- Importantly, the situation is not only evolving in Europe. The Association of Banks in Singapore, the Singapore Foreign Exchange Market Committee and the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) recently published timelines for the discontinuation of SIBOR by end-2024. Following this, the widely used 1-month and 3-month SIBOR will be discontinued in four years’ time, by the end of 2024, whereas the 6-month SIBOR will be discontinued three months after the discontinuation of the 6-month SOR. Moreover, in order to reduce the stock of existing legacy SIBOR contracts at the point of SIBOR’s discontinuation, SC-STS is set to announce during the first semester of 2021 a timeline to cease the usage of SIBOR in new contracts.
In response to this increasing clarity over the IBOR transition agenda, the industry and the regulators are working on the transition mechanisms.
- Among those, negotiators from the European Parliament and Council of the EU struck a deal on provisions to ensure EU financial market stability, ahead of the expected cessation of LIBOR. If necessary, the European Commission (EC) will be granted the power to replace “critical” benchmarks, which influence financial instruments and contracts with an average value of at least €500 billion, benchmarks with no, or very few, appropriate substitutes as well as third country benchmarks whose cessation would significantly disrupt the functioning of financial markets or pose a systemic risk for the financial system in the Union. Crucially, EU market participants will be able to use benchmarks administered in a country outside the EU until the end of 2023 (could be extended to 2025 if duly motivated).
- Secondly, LCH started its own LIBOR cessation consultation (ending January 29, 2021). LCH proposes to confirm a date on (or shortly before) the index cessation effective date, on which it will convert any remaining contracts in the relevant LIBOR once an index cessation effective date has been set for a given LIBOR.
- The GBP RFR WG released a paper on credit adjustment spread (CAS) methods for an active transition of GBP LIBOR referencing loans. Nevertheless, the paper does not recommend a particular approach to the credit adjustment spread in respect of active transition of loans away from GBP LIBOR. It is meant to assist loan market participants in considering the options available for determining the credit adjustment spread by setting out the two key methodologies emerging in the market (i.e the five-year historical median approach; and the forward approach (based on the forward-looking swap market)) in one place.
It describes the options, outlines potential considerations and provides worked examples.
- Finally, Zurich Cantonal Bank (ZKB) and a syndicate of international banks granted a CHF 525m syndicated credit facility to dormakaba Group (SIX: DOKA) which contains an in-built mechanism to switch the base rate from CHF LIBOR to Compounded SARON as an RFR. We are thus witnessing a growing trend that sees switch mechanisms in the loan market.
If the beginning of 2020 marked a timid awareness of the imminence of the LIBOR transition – notably due to the covid 19 crisis – the end of the year, however, saw a growing preparation by all market stakeholders.
This allows institutions to approach the year 2021 with increased confidence and to cross upcoming milestones smoothly. To achieve this objective, the firms should:
- understand the impact of the expected IBA’s announcement to cease LIBOR publication on their organization, clients and products and adjust their IBOR transition plans accordingly; and
- take the necessary steps to implement the relevant system updates ahead of the target milestones in 2021 set by various regulators to, among inter alia, cease the issuance of LIBOR-linked products expiring beyond the end of 2021.
- Further banks introduced SARON products
- ZKB led a syndicate of international banks in CHF 525m syndicated credit with switch mechanism to Compounded SARON
- Development of SARON
Eurozone specific highlights:
- ECB distributed IBOR Survey
- European Parliament and Council struck deal on orderly termination of benchmarks
- EC welcomed agreement reached between European Parliament and Council on financial benchmarks
- Council of the EU endorsed new rules on financial benchmarks’ cessation
- ECB hosted roundtable on fallbacks for EURIBOR
- ESMA held roundtable on EUR RFRs
- JPY RFR Committee released results of consultation on JPY benchmarks
- LCH started LIBOR cessation consultation
- IBA published consultation on potential cessation of LIBOR
- ISDA published webinar “The Path Forward for LIBOR”
- SFBF announced reform process for STIBOR
- LCH proposed position on benchmark fallbacks and FRAs
- IASB vice-chair spoke about IASB work on IBOR
- ISDA published video interview on misunderstandings about ISDA IBOR Fallbacks Protocol
- ISDA published November ISDA-Clarus RFR Adoption Indicator
- Key industry committees set out timelines for SIBOR discontinuation
UK specific highlights:
- GBP RFR WG published paper on RFR non-linear derivatives
- BoE published speech on LIBOR phase-out
- IBA launched GBP SONIA ICE Swap Rate as benchmark for use by licensees
- PRA included LIBOR transition in its 2021 priorities
- GBP RFR WG released open letter to loan system providers and treasury management system vendors
- GBP RFR WG published Q1 2021 roadmap for discontinuation of new GBP LIBOR lending
- GBP RFR WG published paper on credit adjustment spread methods for active transition of GBP LIBOR referencing loans
US specific highlights:
- ARRC released guide and highlighted ISDA webinar on USD LIBOR endgame developments
- ARRC posted updated New York LIBOR legislation draft