The London Interbank Offered Rate (LIBOR) is a set of benchmark interest rates that are based on the rates at which banks estimate they can borrow from each other. It is calculated and published daily across a range of currencies (GBP, USD, EUR, JPY and CHF) and maturities (overnight, one week, one month, two months, three months, six months and one year) and is used world-wide in the calculation of interest and other payments for many loans, derivatives, bonds and other financial transactions.
For the majority of its currencies and tenors, LIBOR will no longer be published after the end of 2021. The below outlines what this means for our customers and what actions to consider. This briefing provides an update on the status of the implementation of replacement rates for LIBOR. It is provided as general guidance and does not constitute specific advice. We are contacting clients directly to discuss individual contract arrangements.
It is estimated that LIBOR underpins around US$ 250 trillion of financial contracts (US$ 30 trillion in sterling markets alone) and was once referred to as the “world’s most important number”.
Following the LIBOR fixing scandal exposed in 2011 and the general decline in the importance of interbank lending in the financial markets, global financial regulators decided that markets must move away from using LIBOR as a benchmark and that LIBOR should be replaced with transaction based Risk Free Rates (RFRs).
In 2017, the Financial Conduct Authority (FCA) announced its intention to stop compelling banks to submit the rates required to calculate LIBOR. UK and global regulators expect financial market participants to complete the steps necessary to cease using LIBOR by the end of 2021. It is currently expected that the most frequently used USD LIBOR tenors will be available until June 2023 for legacy contracts only.
There are shorter timeframes for sterling based facilities (and multi-currency facilities that include sterling), namely:
- From 1 April 2021, no issuance of new GBP LIBOR facilities that mature in 2022 or beyond.
- By 30 September 2021, legacy GBP LIBOR contracts must be transitioned to RFRs.
For LIBOR linked contracts that expire before the end of 2021 (or before the end of June 2023 for existing USD LIBOR linked contracts), we will allow the contract to mature naturally wherever possible. However, we are reviewing all contracts regardless of expiration date.
For LIBOR linked contracts that expire in 2022 or beyond, your Relationship Manager will contact you to discuss the transition to an appropriate RFR.
For new contracts, we will ensure that the language reflects RFRs or, where these are not yet available, allows for discussion with our clients when RFRs are available.
As mentioned above, there are some important differences between LIBOR and the proposed RFRs. Therefore, the transition to the RFRs may have pricing, cash flow, accounting and operational implications for you and your business. The two key differences for backward looking RFRs are:
- they are calculated at the end of the period based on overnight rates, which means that the interest payable is not known until the end of the relevant borrowing period, and
- they do not embed an interbank credit component. This will be addressed by including a credit adjustment spread to the RFR.
The Bank of England, Prudential Regulation Authority and Financial Conduct Authority are collaborating with industry groups such as UK Finance, the Loans Market Association and the Association of Corporate Treasurers on the practical steps to transition to RFRs. Bank ABC is actively monitoring these developments and will engage with our clients to ensure that the transition is completed in an appropriate and mutually satisfactory manner.
We advise undertaking the following actions:
- Understand the reasons for the LIBOR transition and the features of RFRs (please see links below for further information).
- Determine all LIBOR linked transactions or products that you hold with all of your financial service providers, including maturity dates and legal contract language.
- Consider the impact of transitioning from LIBOR to RFRs.
- Consider whether you wish to seek advice from your financial or legal advisers.
- Ensure that your systems, operational processes, risk management practices and financial control and reporting arrangements are ready for the transition.