Switching Lanes: The LIBOR Transition

Overview

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.

What is LIBOR?

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, 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.

Did you find this information helpful?

Why is LIBOR being phased out?

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.

Did you find this information helpful?

When will the changes take effect?

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:

  • Publication of LIBOR rates, for most currencies and tenors/maturities, will cease to exist on the 31st December 2021
  • While for some specific and more complex situations, the publication of selected USD LIBOR rates will be available until June 2023, no new contracts based on LIBOR rates will be issued as from 31st December 2021 (independent of the currency and maturity) in a vast majority on markets

Did you find this information helpful?

About the rates replacing LIBOR

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).

What are RFRs?

Alternative Reference Rates (ARRs) are rates which would potentially replace LIBOR.

After a series of consultations, industry discussions and market feedback, regulators have identified Risk Free Rates1 (RFRs) as the preferred ARRs to LIBOR and are considering how existing benchmark rates might be reformed in accordance with applicable regulation.

RFRs are overnight interest rates derived from actual transactions that are either secured or unsecured. Traditionally RFRs are backward looking, i.e. they are published after the period to which they relate, and are considered more robust and reliable as their calculation is based on historical transactions which are more representative of the underlying markets than IBORs while reducing exposure to systemic risk in the overall markets.

Did you find this information helpful?

What are the RFRs/ARRs replacing LIBOR?

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 table2 below lists the five currencies and the corresponding alternative RFRs:


£ GBP

united-kingdom

$ USD

united-states

€ Euro

european-union

CHF

switzerland

¥ JPY

japan

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 transactionsSecured rate that reflects interest paid on interbank overnight repo
Unsecured rate that captures overnight call market rate

Did you find this information helpful?

What are the main differences between LIBOR and RFRs/ARRs?

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

Did you find this information helpful?

What does LIBOR transition mean for the client?

Contracts having LIBOR exposures and maturity date beyond 31st December 2021 will need to be transitioned to RFRs.  
Beyond 2021, no new contracts will be based on LIBOR.
MCB will engage with its clients impacted by the transition to determine the appropriate next steps.

How do I know if I have exposure that will require transitioning?

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.

Did you find this information helpful?

Will there be any cost/fees associated with the transitioning process of contracts?

There will be costs associated with the transition process, however, MCB will absorb these costs and will not charge any amendment fees or other costs relating to the transitioning process of existing LIBOR exposed contracts.

Did you find this information helpful?

What can I do to make sure I am ready for the transition?

Several steps that we encourage our clients to consider taking for now, would include:

  • Review information available on LIBOR transition and keep up to date with the latest transition developments
  • Review all their outstanding financial contracts referenced in LIBOR that are maturing beyond 2021 (e.g. loans, fixed deposits, mortgages, overdrafts, import/export loans, bonds FCY credit cards, derivatives)These contracts are likely to require transitioning
  • Be reassured that MCB will accompany you throughout this transition and will soon be in touch with you
    (i) to provide you with additional information about the LIBOR transition,
    (ii) detail any contracts you have with the bank and that are impacted by the transition and discuss any required alignment with the recommended international practices and requirements,
    (iii) address questions you may have
    (iv) the way forward and timeframes.

Did you find this information helpful?

Our approach

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.


In parallel, should you have any contracts impacted by the LIBOR transition with MCB, your Relationship Manager/Executive will soon be in touch with you (i) to provide you with additional information about the LIBOR transition, (ii) detail these contracts and discuss any required alignment with the recommended international practices and requirements, (iii) address questions you may have (iv) 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.



or

Contact your Relationship Manager or Private Banker should you need additional info