libor and other benchmarks LIBOR Transition
Preparing for benchmark interest rate reform - find out more about LIBOR, the rationale behind the global benchmark reforms and what you can do to prepare.
In line with the Working Group on Sterling Risk-Free Reference Rates’ updated roadmap and milestones, Standard Chartered will no longer: (1) offer any new or refinanced GBP LIBOR loans, (2) originate, arrange or offer new GBP LIBOR bonds and securitisations, and (3) offer new GBP LIBOR linear derivatives (except for client’s risk management purposes), with maturities ending beyond 2021.
If you have any questions or require further clarification, please contact your Relationship or Product Manager at the Bank, or send an email to IBOR.Transition@sc.com.
Virtual client briefing session
Session 1: Tuesday, 14 September 2021
10:00 AM London/5:00 PM Singapore
Session 2: Wednesday, 15 September 2021
3:00 PM London/10:00 PM Singapore
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Libor Key Market Updates and Industry Developments
Read about the latest updates and developments on the transition.
The Financial Conduct Authority (FCA) has launched a consultation on the relevant factors for determining legacy use of a permanently non-representative benchmark using a changed (i.e. “synthetic”) methodology, and to prohibit new use of a critical benchmark which is ending. The powers are part of a wider package of amendments to the Benchmarks Regulation (BMR) under the Financial Services Act 2021, intended to ensure that the FCA has the appropriate regulatory powers to help reduce risk in the period before LIBOR ceases permanently. The consultation closed on 17 June 2021.
The FCA is expected to publish a policy and feedback statement in Q3 2021.
The FCA has also released a consultation on its proposed decision to use its new powers under the BMR to require the more widely used 1M, 3M and 6M GBP and JPY LIBOR settings to be determined under a changed methodology (i.e. on a synthetic basis) after end-2021. The consultation will close on 27 August 2021.
The Alternative Reference Rates Committee (ARRC) has formally recommended CME Group’s forward-looking SOFR term rates, following the completion of a key change in interdealer trading conventions on 26 July 2021 under the ‘SOFR First’ initiative. The formal recommendation was preceded by the ARRC’s publication of loan conventions and best practices for the scope of use of Term SOFR. In conjunction with this development, the ARRC has also released a factsheet.
The Steering Committee for SOR (Singapore Swap Offer Rate) and SIBOR (Singapore Interbank Offered Rate) Transition to SORA (Singapore Overnight Rate Average) (SC-STS) has confirmed that SOR will be discontinued immediately after 30 June 2023, in line with the cessation timelines of certain USD LIBOR tenors.
Key timelines include:
- To cease usage of SOR in new derivatives contracts by end-September 2021. The requirement to cease new transactions will exclude SOR derivatives transactions for risk management of and transition from legacy SOR positions to SORA.
- To cease usage of SIBOR in new contracts by end-September 2021.
- Confirmed end-date of Fallback Rate (SOR) as end-2024 and emphasised limiting its use.
The SC-STS reiterated that banks should substantially reduce their gross SOR derivatives exposures with other financial institutions to 20 per cent by Q3 2021 and reduce SOR exposures (both cash and derivatives) to corporates to 20 per cent by end-2022. All financial institutions and their customers should also cease usage of SOR in new loans and securities that mature after end-2021, by end April 2021.
The Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) has ruled that the adoption of RFR as an alternative to LIBOR, or as a fallback rate, is permissible. In transitioning to RFRs, the Shariah Committees of each Islamic Banking Financial Institutions will need to determine the appropriateness of invoking the deemed consent mechanism to signify clients’ consent on the incorporation of fallback provisions in the contract’s terms and conditions.
On 5 March 2021, the ICE Benchmark Administration (IBA) announced the results of its consultation to cease the publication of LIBOR benchmark rates.
The confirmed LIBOR cessation dates are as follows:
- EUR and CHF LIBOR – All settings will cease after 31 December 2021;
- JPY LIBOR – Spot Next, 1W, 2M, and 12M will cease after 31 December 2021; 1M, 3M, and 6M will no longer be representative after end-2021 but may be published on a changed methodology after end-2021.
- GBP LIBOR – Overnight, 1W, 2M, and 12M will cease after 31 December 2021; 1M, 3M, and 6M will no longer be representative after end-2021 but may be published on a changed methodology after end-2021.
- USD LIBOR – 1W and 2M will cease after 31 December 2021;
- USD LIBOR – Overnight and 12M will cease after 30 June 2023; 1M, 3M, and 6M will no longer be representative after end-June 2023 but may be published on a changed methodology after end-June 2023.
You can access the details on the websites of the Financial Conduct Authority (FCA) and the International Swaps and Derivatives Association (ISDA).
The public statement by the Financial Conduct Authority (FCA) that the ICE Benchmark (IBA) will cease to provide LIBOR rates in the future constitutes a ’Spread Adjustment Fixing Date’ under the Bloomberg IBOR Fallback Rate Adjustments Rule Book. Thus, the Bloomberg Spread Adjustment for all LIBOR tenors and currencies was fixed on 5 March 2021.
The Fallback Rate calculated for each Rate Record Day from and including 5 March 2021 will use the fixed Spread Adjustments published by Bloomberg available here.
The ICE Benchmark Administration Limited (“IBA”) has launched ICE SONIA Indexes to support the UK lending market’s SONIA transition. These indexes provide a simple method for parties to calculate SONIA compound interest between any two index dates and agree on their associated interest accruals. They provide a daily value that represents accrued compound SONIA interest relative to the first day value of 100 set on 23 April 2018, the first publication date of reformed SONIA by the Bank of England. Users of the index have the option to add a 0% floor to address potential negative interest rates or use a lag for an agreed time shift view.
In July 2017, the UK Financial Conduct Authority (FCA) has stated that they will no longer compel panel banks to contribute quotations for the computation of the London Interbank Offered Rate (LIBOR). Regulators globally have emphasised that firms should move from LIBOR to alternative reference rates (ARRs). This is important as LIBOR underpins contracts affecting banks, asset managers, insurers and corporates, with estimated exposures totalling USD 400 trillion globally on a gross notional basis. Standard Chartered has set up an IBOR Transition Programme, to help the Bank and our clients navigate the many challenges resulting from the transition.
What is LIBOR and why is reform required
What is LIBOR?
LIBOR is arguably the most important Interbank Offered Rate (IBOR) used in global financial markets. It serves as a key interest rate benchmark across a number of financial products including derivatives, securities, loans and mortgages. LIBOR provides an indication of the average rate at which each LIBOR contributing bank can borrow unsecured funds in the London interbank market for a given period, in a given currency. It is calculated and published daily across five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, one week, and one, two, three, six and 12 months) by the ICE Benchmark Administration. It is based on submissions by a panel of banks using available transaction data and their expert judgement.
Why is reform required?
Following the financial crisis, changes to bank capital requirements resulted in a significant decrease in transaction volumes in the unsecured interbank lending market - upon which LIBOR is based. With insufficient transaction data, LIBOR submissions have increasingly relied on expert judgement from the panel banks. Regulators have therefore grown increasingly concerned about the long-term sustainability of the benchmark and have decided to pre-empt any further possible deterioration by indicating their preference of a transition away from LIBOR.
It is not only regulators that are concerned. Panel banks have expressed discomfort about providing submissions “based on judgements with little actual borrowing activity against which to validate their judgements”*
The FCA has reminded all banks and other market participants that they need to have removed dependencies on LIBOR by this date if they are to avoid disruption when the publication of LIBOR ceases.
(*Source: Speech, Andrew Bailey, FCA, July 2017.)
The alternative to LIBOR
Find out about the alternative rates that have been identified
What is the alternative to LIBOR?
Since 2014, a number of jurisdictions have set up working groups to identify alternative RFRs to LIBOR. This was as part of a G20 initiative, delegated to the Financial Stability Board (FSB), to review and reform critical benchmark rates. The FSB established an Official Sector Steering Group (OSSG) to focus its work on the most fundamental interest rate benchmarks. The working groups focused on identifying rates that had markets of suitable size underpinning them and a robust governance framework for their calculation. Some of these rates were already in existence while others had to be created.
Whilst alternative RFRs for each of the LIBOR currencies have now been identified, the different jurisdictions are at varying stages of progress. In particular, the depth and liquidity of the market differs across the respective RFRs and product sets (e.g. derivatives, bonds and loans).
The alternative RFRs are considered more robust and reliable interest rate benchmarks than LIBOR as their calculation is based on actual transactions in the underlying market. For example, while USD LIBOR has a daily average of USD 1 billion of underlying transactions, the chosen replacement, the Secured Overnight Financing Rate (SOFR), is underpinned by daily transactions of approximately USD 1 trillion. Being based on actual transactions, instead of submissions using expert judgement, makes the RFRs more representative of the true cost of funding in the underlying markets.
What does the Transition Roadmap Look Like?
Below is set of important activities and milestones, albeit non-exhaustive, that will support an orderly transition.
There are currently differing levels of liquidity in each of the markets for RFRs, both in comparison to each other, and versus LIBOR. Liquidity in the RFR markets is anticipated to continue building in the period leading-up to 2021, with the potential for declining liquidity in respect of LIBOR markets.
The development of RFR markets requires a number of industry activities to continue to progress, including updates to key pieces of market infrastructure, such as those related to clearing and settlement of RFR-linked trades, continuing product development across derivatives and cash products, as well as the establishment of market conventions across products. Recently the market has seen growing RFR liquidity with the raising of new debt referencing RFRs, as well as the development of the related swaps and futures markets. There has also been a number of issuances in the loan markets which the Loan Market Association (LMA) are attempting to record. Many participants, particularly in the loan markets, are also tracking closely the development of term rates based on the RFRs, with the working groups identified in table above undertaking work in this area, albeit targeting different timelines and potentially adopting different approaches depending on jurisdiction.
Many contractual agreements that reference LIBOR do not anticipate an event such as the permanent cessation of the LIBOR benchmark, and hence, lack contractual provisions for successor benchmarks. This raises the question of how to maintain contractual continuity for those contracts that will be affected by LIBOR transition.
For derivatives, ISDA has published an industry wide ISDA 2020 Protocol to faciliate the incorporation of the updated fallback language into existing derivatives transactions whilst regulatory working groups such as the Alternative Reference Rate Committee (ARRC) and the Working Group on Sterling Risk-Free Reference Rate (RFRWG) have developed fallback language for cash markets.
Another important aspect to consider is the spread adjustment methodologies captured by the fallback language. RFRs are overnight rates, which are considered nearly risk-free, whereas LIBOR is a term rate and reflects perceived bank credit risk. The issue is further complicated as some RFRs are based off secured transactions, whereas others are based off unsecured transactions. Hence, when transitioning to RFRs, a spread methodology will need to be applied to avoid value transfer.
Making the necessary changes to existing contracts to update for the new RFRs, including updating for fallback language, is expected to be a burdensome process. In certain markets, notably the derivative markets, work is underway to develop an approach whereby contractual parties can more easily adopt changes to contracts through signing up to an agreed protocol. The aim is to avoid the need for mass repapering exercises of existing contracts.
However, not all contractual counterparties will wish to adopt a protocol developed by ISDA. In this case, each contract may need to be considered on a case-by-case basis for amendment. In cash markets, industry bodies such as the LMA and ICMA have issued guidance on market conventions in bond markets and exposure drafts for loan markets to facilitate market users in their transition to RFRs.
Market participants have noted a number of potential accounting and tax issues that may arise as a result of the transition to RFRs, including those related to the areas of the recognition and derecognition of assets and liabilities, the measurement of assets and liabilities and hedge accounting.
In this regard, steps have been taken by accounting bodies to ensure that the market is consulted on the accounting issues and that relief is provided as a result of the transition. For example, the International Accounting Standards Board (IASB) has published its final amendments to IFRS and IAS accounting standards in Q3 2020 to ease the accounting implications of the IBOR reform on financial reporting.
Preparing for the transition
Find out how the Bank is preparing for the transition and what you can do to prepare for it
How is Standard Chartered preparing for the transition?
Standard Chartered recognises the impact the transition will have on our clients through the products and services we offer. Accordingly, the Bank has established a central IBOR Transition Programme to prepare for the discontinuation of LIBOR and other IBORs globally, and to assist our clients through the transition.
The Bank is also actively involved in discussions and transition efforts with regulators, industry bodies, trade associations and individual market participants, whilst continuing to stay close to the developments across our geographic footprint. We have also introduced a suite of RFR-referenced products and encourage our clients to consider these, in view of the potential risks associated with LIBOR transition.
What can our clients do to prepare for the transition?
While uncertainties remain, as part of the transition, we encourage our clients to perform an assessment of their LIBOR-referenced exposures and stay up to date with ongoing developments. We recommend that our clients familiarise themselves with the RFRs and consider transacting in alternative RFR-referenced products.
The Bank has compiled a comprehensive checklist which may help you prepare for the transition.
Please contact your relationship or product manager at the Bank with any questions, or send an email to IBOR.firstname.lastname@example.org.
Frequently Asked Questions
The Frequently Asked Questions below attempt to clarify some of the key themes.
On 5 March 2021 the ICE Benchmark Administration (IBA) stated that in the absence of sufficient panel bank support, and without intervention of the FCA to compel continued panel bank contributions to LIBOR, it would not be possible for IBA to publish the relevant LIBOR settings on a representative basis beyond their cessation dates.
The FCA also released an accompanying statement confirming that all 35 LIBOR settings will either cease to be provided by any administrator or will no longer be representative as of the dates outlined below.
Confirmed LIBOR cessation dates
- EUR and CHF LIBOR - all settings will cease after 31 December 2021.
- JPY LIBOR - Spot Next, 1W, 2M and 12M will cease after 31 December 2021; 1M, 3M, and 6M will no longer be representative after end-2021 but may be published on a changed methodology after end-2021.
- GBP LIBOR - Overnight, 1W, 2M, and 12M will cease after 31 December 2021; 1M, 3M, and 6M will no longer be representative after end-201 but may be published on a changed methodology after end-2021.
- USD LIBOR - 1W and 2M will cease after 31 December 2021.
- USD LIBOR - Overnight and 12M will cease after 30 June 2023; 1M, 3M, and 6M will no longer be representative after end-June 2023 but may be published on a changed methodology after end-June 2023.
Each of the five jurisdictions with LIBOR currencies have established national working groups tasked with:
- Determining their replacement rates for LIBOR; and
- Facilitating transition to the replacement or alternative risk-free or near risk-free rates (RFRs)
After a series of consultations, industry discussions and market feedback, RFRs have been identified for all five LIBOR currencies and each are at varying stages of development. These are:
- USD: SOFR (Secured Overnight Financing Rate) administered by the Federal Reserve Bank of New York
- GBP: SONIA (Sterling Overnight Index Average) administered by the Bank of England;
- EUR: €STR (Euro Short-Term Rate) administered by the European Central Bank;
- CHF: SARON (Swiss Average Rate Overnight) administered by the SIX Swiss Exchange; and
- JPY: TONA (Tokyo Overnight Average Rate) administered by the Bank of Japan
Beyond LIBOR, many other regulatory bodies across the globe have followed suit in reviewing the status of their IBORs. In some jurisdictions, regulators are considering to take a multi-rate approach and retain reformed versions of existing IBORs to operate alongside the relevant RFR for that jurisdiction (e.g. Australia, Canada, Hong Kong). However, it remains to be seen how such multi-rate approaches will operate in practice.
For example, in the Asia-Pacific region, both the Hong Kong and Singapore regulators have made a decision to review their local IBORs and plan to adopt a multi-rate approach. For Hong Kong, this involves keeping the Hong Kong Interbank Offered Rate (HIBOR) and enhancing the methodology for the Hong Kong Overnight Index Average (HONIA) rate. For Singapore, tthe Association of Banks in Singapore (ABS) has consulted the industry on Singapore Interbank Offered Rate (SIBOR) transition to Singapore Overnight Rate Average (SORA), with a plan to discontinue SIBOR in the next three to four years. There are also similar initiatives to transition transactions referencing the Swap Offered Rate or SOR (which will be impacted by the discontinuation of USD LIBOR) to SORA and other SGD rates. To find out more about the transition from SOR to SORA, click here.
RFRs are based on overnight transactions and are therefore overnight rates as opposed to LIBOR which is published in multiple tenors. The overnight RFRs are risk-free or nearly risk-free whilst LIBOR reflect bank credit risk premium and other factors such as liquidity and supply and demand fluctuations. Consequently, adjustments need to be made to the relevant RFR to be used as fallbacks to LIBOR.
A “term adjustment” will account for the move from a term rate to an overnight rate and this will likely involve compounding the RFR on a daily basis to arrive at an “adjusted RFR”. For derivatives, ISDA has determined that the compounded setting in arrears rate will apply. Such a methodology will result in an adjusted RFR that is known at the end of the relevant interest period, rather than at the start of the interest period.
A “spread adjustment” will then be applied to the relevant adjusted RFR to account for the rate differential between the relevant LIBOR and the adjusted RFR. For derivative products, ISDA has determined that upon a permanent cessation of LIBOR, the spread adjustment will be based on the historical median spread between the relevant IBOR and the adjusted RFR calculated over a five-year lookback period. For cash products, both the Alternative Reference Rates Committee (ARRC) and the Sterling Risk Free Rate Working Group (RFRWG) have also recommended the use of a similar five-year median spread adjustment methodology.
Work is being done in certain jurisdictions on forward-looking term risk free rates. Please refer to the below questions for more details.
 The Alternative Reference Rates Committee (ARRC) has indicated that for certain products, counterparties may choose to fall back to a simple average of the relevant RFR rather than to a compound average.
Clients with LIBOR exposures due to mature beyond 2021 (or June 2023, for certain USD LIBOR settings) are exposed to the risk of the permanent cessation of LIBOR. Upon the cessation of LIBOR, clients with LIBOR exposures could find their contracts and hedges no longer operate as intended. Furthermore, delaying the transition could lead to increased exposure to liquidity risk if market volumes are reduced, impacting contract repricing.
Clients should consider the transition of any contracts referencing LIBOR to the relevant RFR or an alternative rate as agreed between parties. This could be achieved by way of active conversion or including appropriate fallback language or otherwise in the relevant contracts. We will engage in discussions with our clients in this regard to determine appropriate next steps.
We also encourage our clients to perform an assessment of their LIBOR-related exposures and take steps to understand the risks and impact associated with LIBOR transition on their contracts and respective businesses, including any accounting, tax and operational implications. In this regard, clients may want to consider engaging independent consultants for advice.
The Bank’s approach is aligned with regulatory expectations and requirements, as well as industry developments. Therefore, in line with the Q1 2021 milestone set by the Sterling Risk Free Rate Working Group (RFRWG) for the industry, we have ceased participating or otherwise engaging in new GBP LIBOR-linked loans (syndicated or bilateral), bonds, securitisations, and linear derivatives, effective from 1 April 2021.
We no longer offer any new product exposures maturing beyond the end 2021 in the remaining non-USD LIBOR currencies (being EUR LIBOR, CHF LIBOR or JPY LIBOR). For certain products we may no longer offer any LIBOR based transactions at all. Please contact your Relationship Manager if you have any requirement for a LIBOR based product.
However, when considering whether to enter a LIBOR-referencing contract with us (or to extend an existing one) which will mature after the cessation date of the relevant LIBOR setting, you should be aware of the considerations relating to LIBOR transition. For example, the ARRC has set targets for firms to cease issuance of new USD LIBOR contracts progressively from end Q2 2021. Firms should also be aware of the risks of entering into new long dated LIBOR products that mature after the relevant cessation dates.
In addition, we have already introduced RFR-linked products, which we encourage our clients to consider, and we will continue to develop our RFR capabilities throughout the transition. If you wish to obtain more details at this point, please contact your RM or email email@example.com.
There are several steps that you may consider taking now. Some of these include:
- review information available on LIBOR and other legacy benchmark transition;
- perform a portfolio-wide impact assessment on your LIBOR exposures;
- commence formulating plans to transition from LIBOR to RFRs in your relevant contracts; and
- seek independent professional advice to assess the potential impacts of LIBOR transition such as legal, tax, accounting, financial or other operational implications to your business and your firm.
You may also reach out to your Relationship Manager to discuss any queries you may have in relation to your LIBOR exposures with our Bank. For more information, you may email firstname.lastname@example.org.
Risks relating to benchmarks
This document is provided by Standard Chartered Bank and its affiliates (SCB) for general information only. This document does not supersede any specific product risk disclosures. Whilst SCB endeavours to ensure the information in this note is current, SCB cannot guarantee its accuracy in this rapidly evolving area. In addition, SCB does not represent that the risks highlighted in this document are complete. You should exercise your own independent judgment and seek your own professional advice, where necessary, with respect to the risks and consequences of entering into any financial contracts or purchasing any financial instruments that include a reference to financial indices and reference rates (Benchmarks).
Contact us today to see how Standard Chartered can help.