LIBOR and other benchmarks LIBOR Transition
Preparing for benchmark interest rate reform - find out more about London Interbank Offered Rate (LIBOR), the rationale behind the global benchmark reforms and what you can do to prepare.
Important update
In line with regulatory guidance, since 1 January 2022 Standard Chartered has ceased offering new LIBOR-linked transactions or facilities, with very limited exceptions for USD LIBOR. This is applicable across all jurisdictions where the Bank operates and applies to all our asset classes. New USD LIBOR transactions (overnight, 1-month, 3-month, 6-month and 12-month settings) may continue to be offered in very limited circumstances, mainly for risk management of a client’s existing USD LIBOR positions.
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.
Overview
In July 2017, the UK Financial Conduct Authority (FCA) stated that they would no longer compel panel banks to contribute quotations for the computation of LIBOR after 2021, which kickstarted the beginning of the end for the benchmark rate.
On 31 December 2021, the ICE Benchmark Administration (IBA) ceased publishing non-USD LIBOR settings and 1-week and 2-month USD LIBOR settings.
On 23 November 2022, the FCA reminded all market participants to be prepared for the cessation of:
the 1-month, 3-month and 6-month synthetic JPY LIBOR settings at the end of 2022.
the 1-month and 6-month synthetic GBP LIBOR settings at the end of March 2023.
the overnight and 12-month USD LIBOR settings at the end of June 2023.
the 3-month synthetic GBP LIBOR setting at the end of March 2024.
The FCA also on 23 November 2023 launched a consultation on proposals to require publication of the 1-month, 3-month and 6-month USD LIBOR settings on a synthetic and non-representative basis until end September 2024.
The publication of a synthetic USD LIBOR rate, along with the permissible use for such a rate, remains under consultation by the FCA and has not been confirmed. The FCA expects to announce a final decision in late Q1 or early Q2 2023.
Standard Chartered has a dedicated IBOR Transition Programme to help the Bank and our clients navigate the many challenges resulting from the transition.
Background
What is LIBOR and why is the reform required
What is LIBOR?
London Interbank Offered Rate (LIBOR) has historically been a key interest rate benchmark for global financial markets across a number of financial products including derivatives, securities, loans and mortgages. LIBOR provided an indication of the average rate at which each LIBOR contributing bank could borrow unsecured funds in the London interbank market for a given period. It was based on submissions by a panel of banks using available transaction data and their expert judgement covering five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, 1-week, 1-month, 2-month, 3-month, 6-month and 12-month) and published daily by the IBA. Following the 31 December 2021 cessation date, only USD LIBOR continues to be published on a representative basis in overnight, 1-month, 3-month, 6-month and 12-month settings.
Why is the 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 increasingly relied on expert judgement from the panel banks. In 2017, the FCA and the Bank of England’s Financial Policy Committee (FPC) noted that it had become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions raised serious questions about the future sustainability of the LIBOR benchmarks. The regulators, therefore, decided to pre-empt any further possible deterioration by encouraging transition away from LIBOR.
In addition, it was not only regulators that were concerned. Panel banks expressed discomfort about providing submissions “based on judgements with so little actual borrowing activity against which to validate those judgements”*.
(*Source: Speech, Andrew Bailey, FCA, July 2017.)
The alternative to LIBOR
Find out about the alternative rates that have been identified
What are the alternatives to LIBOR?
Authorities in Financial Stability Board (FSB) jurisdictions set up National Working Groups which identified alternative Risk-Free Rates (RFRs) and coordinated and engaged the industry on the transition to these rates.
RFRs are calculated based on actual transactions in their underlying markets meaning they are more robust and reliable than LIBOR and also address LIBOR’s systemic weakness as RFRs do not have a reliance on submissions by experts at panel banks. The Secured Overnight Financing Rate (SOFR) has been selected as the recommended alternative rate for USD LIBOR by the Alternative Reference Rates Committee (ARRC), the private-market body convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition away from USD LIBOR. SOFR is a broad measure of the actual cost of borrowing cash overnight collateralised by US Treasury securities in the repurchase agreement market. This rate is robust, is not at risk of cessation, and it meets international standards.
Whilst USD LIBOR will continue to be published through to 30 June 2023, new transactions will be offered on SOFR in the first instance.
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?
At Standard Chartered, we recognise 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 that has helped clients with non-USD LIBOR remediation activities up until 31 December 2021.
As we approach the 30 June 2023 USD LIBOR cessation date, the IBOR Transition Programme will remain focussed on supporting clients with their remediation efforts. The Bank is 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 introduced a suite of RFR-referenced products and encourage our clients to consider these for both new transactions and when remediating relevant existing USD LIBOR or other IBOR contracts.
What can our clients do to prepare for the transition?
Whilst 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 RFR-referenced products.
The Bank has compiled a comprehensive checklist which may help you prepare for the upcoming cessation of USD LIBOR and other IBORs globally.
Please contact your Relationship or Product Manager at the Bank with any questions or send an email to IBOR.transition@sc.com.
Frequently Asked Questions
The Frequently Asked Questions below attempt to clarify some of the key themes.
In line with regulatory requirements, since 1 January 2022, the Bank ceased offering new LIBOR-linked products. There are very limited exceptions to this prohibition whereby new USD LIBOR transactions pertaining to the risk management of existing USD LIBOR positions may continue to be provided.
Clients should consider transacting in alternative reference rates as soon as practicable. Please contact your Relationship Manager if you have any requirement for a USD LIBOR-based product.
Clients should also be aware that facilities with a last fixing date close to 30 June 2023 may be subject to increased market volatility as liquidity shifts away from USD LIBOR to alternative rates.
Remediation of USD LIBOR exposures should commence as soon as possible given the 30 June 2023 cessation date.
The Bank strongly encourages clients to formulate their own views on the advantages and disadvantages of potential remediation methodologies, including the timing of transition and the alternative rate selected. Each client should be taking into account their particular needs and circumstances, and seek independent advice, if necessary.
Yes, SOFR can be used as the replacement rate when remediating your existing USD LIBOR contracts. In order to use SOFR, a Credit Adjustment Spread (CAS) must be applied to account for the credit premium and term premium differential between USD LIBOR and SOFR.
For derivative products, the International Swaps and Derivatives Association (ISDA) has determined that upon a permanent cessation of LIBOR, their spread adjustment will be based on the historical median spread between the relevant IBOR and the adjusted RFR calculated over a 5-year lookback period. The ISDA CAS, published by Bloomberg, has been fixed for the respective LIBOR tenors and settings as of 5 March 2021.
For active conversions of cash products referencing USD LIBOR, the ARRC recommends a spread adjustment methodology based on a historical median over a 5-year lookback period calculating the difference between USD LIBOR and SOFR. The 5-year median spread adjustment methodology matches the methodology recommended by the ISDA for derivatives and would make the ARRC’s recommended spread-adjusted version of SOFR comparable to USD LIBOR and consistent with the ISDA’s fallbacks for derivatives markets.
Clients with USD LIBOR exposures due to mature beyond 30 June 2023 bear the risks related to the permanent cessation of USD LIBOR. Upon the cessation of USD LIBOR, clients with USD LIBOR exposures could find that 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 USD LIBOR to SOFR or an alternative rate as agreed between parties. This could be achieved by way of active conversion or by including appropriate fallback language in the relevant contracts. The Bank is in discussions with our clients in this regard to determine appropriate next steps.
The Bank also encourages our clients to perform an assessment of their USD LIBOR-related exposures and take steps to understand the risks and impact associated with USD 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.
Risks relating to benchmarks
This document is provided by Standard Chartered Bank and its affiliates (SC) for general information only. This document does not supersede any specific product risk disclosures. Whilst SC endeavours to ensure the information in this note is current, SC cannot guarantee its accuracy in this rapidly evolving area. In addition, SC 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).
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