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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.

 

To prevent disruption to the market, following confirmation from the FCA, the IBA will continue to publish 1-month, 3-month and 6-month LIBOR rates for GBP and JPY on a synthetic basis until the end of 2022 to allow more time to complete the transition for tough legacy contracts. For 1-month, 3-month and 6-month synthetic GBP LIBOR rates, the FCA may continue to publish for a period of up to 10 years, subject to an annual review.

 

The IBA will continue to publish overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings until 30 June 2023 at which point they will either cease publication or become unrepresentative. However from 1 January 2022, USD LIBOR is no longer available for use in new contracts, aside from very limited exceptions for risk management.

 

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?

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 was 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. Regulators, therefore, grew increasingly concerned about the long-term sustainability of the benchmark and 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.)

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.

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.

For 2022 and beyond, the IBOR Transition Programme is focused on supporting the Bank and its clients with their remediation efforts in advance of the 30 June 2023 USD LIBOR cessation date and the potential cessation of other IBORs globally. 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 alternative 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.

The FCA statement and IBA feedback statement include declarations on the future permanent cessation or loss of representativeness of all 35 LIBOR settings as follows:

LIBOR

Tenor

End of Panel Bank Submissions

Potential “Synthetic LIBOR” Publication1

Date

Result

Begin

End2

CHF

All

31 December 2021

Permanent cessation

Not applicable

Not applicable

EUR

All

31 December 2021

Permanent cessation

Not applicable

Not applicable

GBP

O/N, 1W, 2M, 12M

31 December 2021

Permanent cessation

Not applicable

Not applicable

1M, 3M, 6M

31 December 2021

Loss of representativeness

1 January 2022

31 December 2022, subject to FCA’s further consultation3

JPY

O/N, 1W, 2M, 12M

31 December 2021

Permanent cessation

Not applicable

Not applicable

1M, 3M, 6M

31 December 2021

Loss of representativeness

1 January 2022

31 December 2022

USD

1W, 2M

31 December 2021

Permanent cessation4

Not applicable

Not applicable

O/N, 12M

30 June 2023

Permanent cessation

Not applicable

Not applicable

1M, 3M, 6M

30 June 2023

Loss of representativeness

1 July 20235

Subject to FCA’s further consultation3, 5

[1] Publication of synthetic LIBOR is contingent on subsequent FCA consultations.

[2] Each of the LIBORs would permanently cease publication following the end of the synthetic LIBOR publication period.

[3] The FCA’s powers allow them to compel publication of synthetic LIBOR for a period of up to 10 years, subject to an annual review during that time.

[4] Under the ISDA fallbacks, 1W and 2M USD LIBOR settings will be computed by the calculation agent using linear interpolation between end of 2021 and 30 June 2023, before falling back to the adjusted RFR plus spread adjustment.

[5] The FCA noted they will “consider the case” for using the proposed powers under UK benchmark regulation legislation to require continued publication of 1M, 3M, and 6M USD LIBOR settings on a synthetic basis after 30 June 2023.

Each of the five jurisdictions with LIBOR currencies have established National Working Groups tasked with:

  • Determining their replacement rates for LIBOR.
  • Facilitating transition to the replacement or alternative RFRs.

After a series of consultations, industry discussions and market feedback, RFRs have been identified for all five LIBOR currencies. These are:

  • USD: SOFR administered by the Federal Reserve Bank of New York.
  • GBP: Sterling Overnight Index Average (SONIA) administered by the Bank of England.
  • EUR: Euro Short-Term Rate (€STR) administered by the European Central Bank.
  • CHF: Swiss Average Rate Overnight (SARON) administered by the SIX Swiss Exchange.
  • JPY: Tokyo Overnight Average Rate (TONA) 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. Some jurisdictions are considering a multi-rate approach, retaining reformed versions of their existing IBORs to operate alongside the relevant RFR for that jurisdiction. However, it remains to be seen how such a multi-rate approach will operate in practice.

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 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.

Overnight, 1-month, 3-month, 6-month and 12-month settings of USD LIBOR will continue to be published until 30 June 2023 so any USD LIBOR contracts maturing beyond this will need to be remediated prior to this cessation date.

The Bank will reach out to you to discuss the remediation of your portfolio in 2022 but if you are ready to commence transition or would like to discuss this further then you should reach out to your Relationship Manager.

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 to seek independent advice, if necessary.

SOFR is based on overnight transactions, as opposed to USD LIBOR, which is forward-looking, term-based and published for various tenors. The overnight SOFR rates are risk-free or nearly risk-free whilst USD LIBOR reflects bank credit risk premium and other factors such as liquidity and supply and demand fluctuations. Consequently, adjustments need to be made to SOFR to be used as fallbacks for USD LIBOR.

A Credit Adjustment Spread (CAS) will be applied to SOFR 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 five-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 five-year lookback period calculating the difference between USD LIBOR and SOFR. The five-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 are exposed to the risk of the permanent cessation of USD LIBOR. Upon the cessation of USD LIBOR, clients with USD 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 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 will engage 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 (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).

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