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IBOR TRANSITION What are IBORs? Interbank offered rates (IBORs) such as London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR) or Euro Overnight Index Average (EONIA) are a measure of the interest rate banks were willing to pay one another to lend or borrow cash. IBORs are broadly used by market participants in a wide range of product types: - Lenders and borrowers use IBORs as the benchmark reference for determining interest rates for various cash products such as corporate loans and mortgages. - Corporations use IBORs as a reference rate for debt capital market transactions, such as the issuance of floating rate notes. - IBORs are also the standard benchmarks in derivatives markets. Why are IBORs being reformed? IBORs are published daily and are calculated from the average rates at which a pool of banks, called “panel banks”, would lend/borrow wholesale unsecured funds, for set periods of time, in particular currencies. The submissions from the “panel banks” are determined based on data from a range of relevant transaction types but these could also utilise qualitative criteria such as the expert judgement of the submitter. As a consequence of the financial crisis, the number of interbank unsecured borrowing transactions were reduced. This led to an increased reliance on the expert judgment of panel banks when making IBOR submissions. In 2013, the International Organization of Securities Commissions (IOSCO) issued the ‘Principles for Financial Benchmarks’ (IOSCO Principles), which resulted in 2014, Financial Stability Board (FSB) publishing its report ‘Reforming major interest rate benchmarks’. These reports sets out a series of recommendations to strengthen existing benchmarks by underpinning them, to the greatest extent possible, with real transaction data and to develop alternative, nearly risk -free rates. Furthermore, new regulations, such as the EU Benchmark Regulation (BMR)1, have been established following the IOSCO Principles in order to mandatorily enhance the robustness and integrity of benchmark rates. 1 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment Funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 As a result, some IBORs are transitioning to new or amended benchmarks (e.g. EONIA and LIBOR) or have been reformed to become BMR-compliant (e.g., EURIBOR2). EONIA and LIBOR transition International supervisory bodies, financial authorities and market participants are undergoing a process to replace EONIA and LIBOR with nearly risk-free rates. National working groups with both public and private market participants were created to identify alternative nearly risk free rates that would comply with the principles for financial benchmarks outlined by IOSCO. The proposed alternative nearly risk-free rates for EONIA and LIBOR are the following: When will EONIA and LIBOR transition take place? The calendar for EONIA and LIBOR transition is as follows: EONIA On 13 September 2018, the working group recommended adopting the euro short-term rate (€STR) as the risk free rate for the euro area instead of EONIA. Since 2 October 2019, the date on which the €STR became available, EONIA is determined as the €STR plus a spread of 8.5 basis points. 2 EURIBOR is not transitioning to a new rate, but it has been reformed to become a BMR-compliant index. EURIBOR can continue to be used in new and legacy contracts for the foreseeable future. 3 At the request of the FSB’s Official Sector Steering Group, the International Swaps and Derivatives Association, Inc. (ISDA) is considering fallbacks for derivatives referencing EUR LIBOR based on euro short-term rate (€STR) as the risk-free rate identified for the euro area This change in EONIA’s methodology is intended to facilitate the market’s transition from EONIA to €STR, with the former expected to be discontinued by 3 January 2022. LIBOR The Financial Conduct Authority (FCA) announced in 2017 its intention to stop compelling banks to submit the rates required to calculate LIBOR after the end of 2021. The FCA and other regulators have encouraged participants in the financial markets to take steps to stop using LIBOR by this date. As a result, the future of LIBOR is not guaranteed beyond the end of 2021. On December 2020 ICE Benchmark Administration (IBA), the FCA–regulated and authorised administrator of LIBOR, launched a consultation on its intention that the EUR, GBP, CHF and JPY LIBOR panels would, subject to confirmation following its consultation, cease at end-2021. Likewise, IBA intends that one week and two months USD LIBOR settings will cease at end- 2021, and that the USD LIBOR panel will cease at end-June 20231. On 5 March 2021, FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative: - immediately after 31 December 2021, in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and - immediately after 30 June 2023, in the case of the remaining USD settings (Overnight, 1-, 3-, 6- and 12-months) What is next? Authorities and industry groups are working through the implications of these changes, including how best to transition to the nearly risk-free rate benchmarks in relation to EONIA and LIBOR. Santander is working closely with the industry and is committed to ensuring the transition is as smooth as possible while keeping customers informed throughout this transition. Further information ISDA - Benchmark Reform and Transition from LIBOR: This page serves as the central repository for information from ISDA relating to financial benchmark reform and the transition from LIBOR. Working Group on Euro Risk – Free Rates: Official website of the Working Group on Euro Risk – Free Rates. Updated information and publications about the EONIA and the €STR. Sterling Working Group on Risk-Free Rates: Official website of the Sterling Working Group on Risk-Free Rates (RFRWG). Updated information and publications about the GBP LIBOR and the SONIA. 1This consultation has remained open for comments until 25 January 2021 and results are expected to be published shortly after. Alternative Reference Rates Committee: Official website of the Alternative Reference Rates Committee (ARRC). Updated information and publications about the USD LIBOR and the SOFR. The National Working Group on Swiss Franc Reference Rates: Official website of The National Working Group on Swiss Franc Reference Rates. Updated information and publications about the CHF LIBOR and the SARON. Preparedness for the Discontinuation of LIBOR: General information about the TONAR (update information and publications). LIBOR/RFR Glossary of terms: Glossary of LIBOR/RFR terms. Guide for business customers: This guide is intended for business customers with LIBOR-linked loans to help you understand: the anticipated discontinuation of the benchmark rate LIBOR, why LIBOR is being discontinued, and what you should expect to hear from your bank or lender in the coming months FSB report: The “Reforming Major Interest Rate Benchmarks: 2020 Progress report” provides specific information the benchmarks impacted by the IBOR transition, contractual robustness and accounting, tax and regulatory issues. LMA: LMA official site where a specific IBOR microsite can be found. LSTA: LSTA official site .
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