After almost 35 years, London Interbank Offered Rate (LIBOR), the most widely used benchmark interest rates for the pricing of loans, fixed deposits, debt securities and derivatives will no longer be published.
The London Inter-Bank Offered Rate (LIBOR) is a daily benchmark interest rate which is calculated by averaging the rates at which panel banks would obtain wholesale unsecured funding.
LIBOR rates are published on each London business day after submissions made by panel banks to the administrator, the Inter-Continental Exchange Benchmark Administration (IBA), and are available in five currencies (British pound Sterling, Euro, US dollar, Swiss Franc and Japanese Yen) and range from overnight to 12 months.
LIBOR is currently used to set the rates for more than 350 trillions of dollars (more than 13 times the GDP of China in 2021) in various financial products such as derivatives, bonds, loans, deposits, structured products, mortgages.
Certain currencies also use specific benchmarks such as EURIBOR and EONIA for EUR or the Tokyo Interbank Offered Rate (TIBOR) for JPY.
Further to the 2007 financial crisis, in particular, the decline in volume of transactions on the unsecured interbank lending resulted into an underlying market which has not been an active one ever since. Today’s publication of LIBOR rates relies heavily on "expert judgement" and this situation is foreseen as unsustainable by regulators as it represents potentially a serious source of vulnerability and systemic risk.
The UK Financial Conduct Authority (FCA) announced that it would no longer persuade or require LIBOR panel banks to provide submissions after 2021 and thus LIBOR rates would eventually need to be replaced.
The end of the year 2021 is seen as the key deadline for the transition.
In March 2021, the Financial Conduct Authority (FCA), which oversees the LIBOR process, and the Inter-Continental Exchange Benchmarking Administration (IBA), the administrator of LIBOR, have confirmed the cessation dates of LIBOR rates. It is important to note that:
The phasing out of LIBOR marks one of the biggest changes to the structure of financial markets. Global initiatives have been launched to reform the LIBOR as well as other Interbank Offered Rates (IBOR) benchmarks and commence the transition to Risk Free Rates (RFRs)/Alternative Reference Rates (ARRs).
Each of the home jurisdictions of the five LIBOR currencies have established national working groups tasked with determining the preferred RFRs for their corresponding local currencies.
The table below lists the five currencies and the corresponding alternative RFRs:
£ GBP🇬🇧 | $ USD🇺🇸 | € Euro🇪🇺 | CHF🇨🇭 | ¥ JPY🇯🇵 | |
Alternative RFR | SONIA Reformed Sterling Overnight Index Average | SOFR Secured Overnight Financing Rate | €STR Euro Short-Term Rate | SARON Swiss Average Rate Overnight | TONAR Tokyo Overnight Average Rate |
Administrator | Bank of England | Federal Reserve Bank | European Central Bank | SIX Swiss Exchange | Bank of Japan |
Rate type | Unsecured | Secured | Unsecured | Secured | Unsecured |
Underlying transactions | Money markets | Repo transactions | Money markets | Repo transactions | Money markets |
Short description | Unsecured rate that covers overnight wholesale deposit transactions | Secured rate that covers multiple overnight repo market segments | Unsecured rate that covers overnight wholesale deposit transactions | Secured rate that reflects interest paid on interbank overnight repo | Unsecured rate that captures overnight call market rate |
The main differences between RFRs and IBORs are the following:
LIBOR | RFRs | |
| Calculation Methodology | Forward-looking estimate based on panel bank submissions | Backward-looking calculated mean based on transactions |
| Publication | All Currency LIBOR in all tenors available around noon Greenwich Mean Time | Published at time of home jurisdictions and all RFRs available on T+1 (except SARON) |
| Term Structure | Seven tenors from overnight to 12 months | Overnight rates |
| Term and Credit Premium | Includes both a term and credit premium | As the name suggest, RFRs are risk free with no term nor credit premium embedded |
| Volumes | Based on narrow range of contributor banks | Based on robust, very liquid underlying markets, reflects actual transactions |
| Consistency/Timing | Quoted on the same basis and time for all five currencies | Different methodology and publication timelines for each currency |
| Administrator | Private Sector | Central Banks (except SARON) |
| Timing of Interest Rates | Known at the start of each interest period | Known only a few days before the end of interest period |
Contracts having LIBOR exposures (except those leveraging the extension to June 2023) and maturity date beyond 31st December 2021 will need to be transitioned to RFRs.
As from January 2022, no new contracts will be based on LIBOR.
MCB will engage with its clients impacted by the transition to determine the appropriate next steps.
MCB is currently scoping impacted contracts and assessing whether amendments may be required for LIBOR discontinuation and how to best make these amendments.
MCB will get in touch with its clients for the needed amendments.
However, we do encourage you to review all your outstanding financial contracts that are maturing beyond 2021 to ascertain if they reference LIBOR (either directly or indirectly) for any determination.
If in doubt, we advise clients to seek advice with their Relationship Manager or key contact person at the Bank to evaluate the impact on each existing transaction as well as on his/her portfolio.
Several steps that we encourage our clients to consider taking for now, would include:
To complete this journey, MCB has launched its LIBOR transition programme to ensure that the bank and its clients are well prepared for the end of LIBOR, as we know it. Alongside our dedicated LIBOR transition teams overseeing the adaptation of our products, systems, processes, and people towards the use of RFRs, we are keeping abreast of the latest evolutions of the global industry. We are also working closely with regulators and leveraging our large network of international partners in different markets, in order to provide our clients with the latest information and ensure an overall smooth transition.
Our team is actively reaching out to our impacted customers (i) to provide additional information about the LIBOR transition, (ii) for more details on the contracts and discuss any required alignment with the recommended international practices and requirements, (iii) to address any questions, (iv) and advise on the way forward and timeframes.
MCB remains committed in accompanying you along every step of this transition, and we are available should you have any queries/questions.
Download our Frequently Asked Questions (FAQ) here or contact your Relationship Manager or Private Banker should you need additional info.
