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, 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.
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.
When will these 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 31st December 2021
- Publication of selected USD LIBOR rates will be available until end of June 2023, while these will be available for transitioning existing USD LIBOR contracts with more complex settings
- 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
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 Rates (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.
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:
|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
|Bank of England
||Federal Reserve Bank
||European Central Bank
||SIX Swiss Exchange
||Bank of Japan
|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|
What are the main differences between LIBOR and RFRs/ARRs?
The main differences between RFRs and IBORs are the following:
||Forward-looking estimate based on panel bank submissions
||Backward-looking calculated mean based on transactions
||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)
||Seven tenors from overnight to 12 months
|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
||Based on narrow range of contributor banks
||Based on robust, very liquid underlying markets, reflects actual transactions
||Quoted on the same basis and time for all five currencies
||Different methodology and publication timelines for each currency
||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|
What does LIBOR transition mean for the client?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.
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.
Will there be any cost/fees associated with the transitioning process of contracts?
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.
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.
Contact your Relationship Manager or Private Banker should you need additional info