DOCSLIB.ORG

The LIBOR Transition

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text

Load more

www.pwc.no The LIBOR transition Where are we now? Q1 2019 The LIBOR transition – Where are we now? A new paradigm, … …and our way to deal with it The transition away from currently used interbank offered To deal with this complexity, the present overview pro- rates, particularly LIBOR, to new or reformed benchmark vides the current status of the transition process along- rates poses one of the biggest challenges for financial side the five major currencies. We use a structured grid to firms in the upcoming years. Whereas some time ago, evaluate the administrative and methodological set-up of only few subject matter experts and newly appointed the new benchmarks, their envisaged fallback and term transition managers at financial firms dealt with the topic, approaches, the dynamics of their underlying borrowing it has in the meanwhile been brought to the attention of and lending markets, and the adoption of the rates by a broad range of industry practitioners. They all, how- cash and derivatives markets. ever, face the same challenge of coping with the growing For further thought leadership on this journey towards a complexity and faster pace of the developments around new financial paradigm, please have a look at pwc.com/ the transition. libor. …growing complexity… Staying ahead of the knowledge curve during the LIBOR transition increasingly resembles looking at a mosaic of information. Where LIBOR ensured a common, homoge- neous approach across multiple currencies, this simplic- ity will be lost under the new paradigm. The complexity is the result of multiple dimensions that accompany the transition. Different currencies, markets, approaches, fallback languages, etc. show how fragmented the land- scape is. 2 | The LIBOR transition – Where are we now? Rates overview CHF – SARON USD – SOFR GBP – SONIA EUR – €STR EUR – EURIBOR JPY – TONAR The LIBOR transition – Where are we now? | 3 The Swiss Average Rate Overnight (SARON) Administration and Methodology & eligible governance overview transactions The National Working Group on Swiss Franc Reference SARON is a secured rate Rates (“working group”) combines representatives of It is continually calculated in real time and published private-sector banks and the Swiss National Bank [1] every ten minutes. In addition, fixing is conducted The working group has recommended SARON as the three times a day: at 12am, 4pm and 6pm. The 6pm fi- alternative for the CHF LIBOR xing serves as the main daily reference for subsequent Originally, SARON dates back to 2009, when it repla- usage, e.g. for derivative payments or the valuation of ced the previously used repo overnight index financial assets [2] SIX Swiss Exchange calculates and publishes SARON SARON is based on concluded transactions and trade [2] quotes posted on the SIX Repo trading platform, provi- ded they lie within the parameters of a quote filter. The An application process for SARON to be endorsed un- filter prevents quotes that diverge too much from the der the EU BMR is planned. SIX expects the process current interest level from distorting the average rate to be completed around end-2019 [3] and thus limits the possibilities for manipulation. The rate is recalculated every time a trade is concluded or a new quote is issued, provided they meet certain specifications [2] Only standardised, CHF-denominated repurchase agreements with fixed-income securities eligible for SNB repo transactions (general collateral) are used to calculate the reference rates and indices 4 | The LIBOR transition – Where are we now? CHF – SARON USD – SOFR GBP – SONIA EUR – €STR EUR – EURIBOR JPY – TONAR Fallback Envisaged approach for solutions term rate construction ISDA is working on amending its 2006 Definitions to The working group came to the conclusion that a implement viable fallbacks for the discontinuation of robust derivatives-based term rate is unlikely to be different IBORs [4] feasible given the limited liquidity in Swiss derivatives Although the approach is ISDA-specific, it can be markets. A forward-looking term rate based on deri- considered as having a significant signalling effect for vatives referencing SARON is not expected to be as all IBOR-referencing products, not least since ISDA robust as the reference rate itself. If this changes in the reached out to a broad group of market participants in future, the use of a derivatives-based term rate as a its consultation fallback rate might be re-assessed. The working group therefore opted for a backward-looking calculation The approach covers CHF LIBOR and proposes method based on the average of daily SARON rates SARON to be its fallback rate as soon as CHF LIBOR over a given period. Wherever possible, a compound- is permanently discontinued (based on defined ed SARON should thus be used as term rate [5] triggers) Using a backward-looking compounded term rate can Since CHF LIBOR is an unsecured term rate, adjust- lead to cash flow uncertainty. However, there are ways ments for the term and the credit component have to to explore to mitigate this uncertainty, and further work form part of the fallback needs to be conducted as to how these could work in For the term adjustment, it was concluded after the practice and regarding potential legal challenges consultation that backward-looking, daily compoun- Given that derivatives markets in other currencies do ding of the o/n rate (i.e. SARON) is the most suitable have substantial liquidity and that those markets are approach actually considered as a favourable option for deriving This is combined with calculation of a historical ave- term rates, the transition over the next years might rage credit spread prior to discontinuation to account lead to a fragmentation of conceptual approaches for the credit risk component that forms part of CHF across currencies LIBOR but not of SARON In March 2019, SIX started to publish rolling, com- For CHF, this likely means that at the discontinuation pounded SARON rates with different time windows for of LIBOR, the average difference between LIBOR and illustrative purposes [6] term-adjusted SARON will be calculated for a time The working group is continuing to work out solu- period yet to be defined (probably several years) and tions as to how uncertainty about cash flows can applied as a fixed spread to the term-adjusted SARON be addressed best under a given backward-looking for the legacy contract approach Notably, this term approach for fallback language is The working group is further continuing to develop the conceptually close to the envisaged methodology of design of SARON-based derivatives such as options the working group for deriving term rates generally and cross currency basis swaps from SARON for cash products (see below) [5]; thus a chance can be seen for CHF to create a relatively har- The 3M followed by the 6M tenors are most widely monised approach between legacy fallback language used for CHF LIBOR according to a survey by ICE [24] and the actual market convention for term rates in the future The majority of respondents to ISDA’s consultation process prefer using the term and credit spread ad- justment across all currencies/benchmarks covered by the consultation Discussions on the fallback language for legacy retail loans referencing CHF LIBOR after 2021 continue on a Swiss-domestic level. A first draft basis for language respecting Swiss legislation is being discussed for retail loans Switzerland can typically be seen as a jurisdiction that particularly values the rights of individual parties to a contract. It seems unlikely that governmental or regulatory bodies could impose the acceptance of an industry solution upon parties against their consent Based on the consultation feedback, ISDA will analyse the results in further detail and continue to develop the final proposal for parameters in the fallback language with its independent advisors The LIBOR transition – Where are we now? | 5 Liquidity and Markets and rate dynamics products The transactions that underlie the calculation of Cash SARON and the adjacent volume permitted (binding Debt issuances linked to SARON are not known so far quotes) amount to approx. CHF 5bn daily [2] Historically, the volume of such transactions can vary Futures (see graph) [2] EUREX launched SARON futures in October 2018 for 3M based on the recommended specifications by the Historical rate volume underlying SARON working group, with a contract size of CHF 1m [7] 25 The current naming convention by EUREX may be changed in 2019 to align with futures contracts in other 20 currencies n 15 b The future volume for SARON has been steadily incre- F 10 H C asing since launch (see graph below); at the end of Q1 5 2019, open interest stood at approx. 1,100 contracts [8] 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 SARON 3M future volume at EUREX Rate volume SARON 1’500 Various term rates up to one year exist for the SAR 1’000 (e.g. SAR1M). The liquidity is, however, not high enough to support the derivation of term rates directly 500 (see graph below for 2018 [2]), hence the previously mentioned approach via compounding on o/n rates is - considered Nov Dec Jan Feb Mar New trades Open interest Liquidity of SAR[ON] and SAR[Term] 6 100% Swaps SARON swaps have started to be cleared by LCH and n 4 EUREX. The observable volume indicates that SARON b F 50% swaps have reached the levels of former TOIS swaps. H C 2 However, volumes are still relatively small compared to swaps referencing CHF LIBOR. It is expected that - 0% volumes will continue to pick up once cash products SARON 2W 1M 3M 9M are based on SARON Average daily volume (left scale) Looking at US transactions reported under swap re- Days without any volume (right scale) positories (DTCC/Bloomberg SDRs), ISDA counted 16 cumulative trades with a notional of CHF 2.5bn as per end-2018, up from 10 trades/CHF 1.3bn in the quarter before [30] At the end of 2017, SARON replaced the old TOIS with overnight rates, e.g.
Recommended publications
  • The Search for a Libor Replacement

    The Search for a Libor Replacement

    THE INTERNATIONAL DEBT CAPITAL MARKETS HANDBOOK 2020 23rd Edition The Great Transition: The search for a libor replacement by Esohe Denise Odaro, International Finance Corporation No one knew it at the time, but in 1969 Minos Zombanakis was soon to make history. That winter, the Greek financier had convened a group of banks in Manufacturers Hanover's newly minted London office. His intention? To formalise the first syndicated loan of its kind to fund an US$80m loan to Iran. Given the immense scale of the loan at that time, Zombanakis aimed to reduce lender risk and increase appetite among candidate banks by apportioning the credit across several lenders, thereby generating a syndicated loan. 38 At the time, interest rates in the UK were 8% and rising, so instruments and asset classes. From the early 1980s most banks were reluctant to lend at a fixed rate for an onwards, The British Bankers' Association (BBA) extended duration. Consequently, Zombanakis devised a administered the LIBOR rate-setting process. By 2005, the system whereby the borrower – in this case, Iran – could be BBA would survey a panel of 16 banks daily, and LIBOR was charged a variable interest rate. He proposed that the calculated using only the average of the median eight pricing should be based on the syndicate's weighted quotes. The BBA produced 150 LIBOR benchmarks in 10 average cost of funding plus a spread for a predetermined currencies with 15 maturities (overnight to 12 months). period. To achieve this, the banks in the lending syndicate Historically, only a few voiced apprehensions about the would report their funding costs before the loan's "rolling structural weaknesses of the LIBOR setting process.
  • Replacing the LIBOR with a Transparent and Reliable Index of Interbank Borrowing: Comments on the Wheatley Review of LIBOR Initial Discussion Paper

    Replacing the LIBOR with a Transparent and Reliable Index of Interbank Borrowing: Comments on the Wheatley Review of LIBOR Initial Discussion Paper

    Replacing the LIBOR with a Transparent and Reliable Index of Interbank Borrowing: Comments on the Wheatley Review of LIBOR Initial Discussion Paper 6 September 2012 * Rosa M. Abrantes-Metz and David S. Evans *Abrantes-Metz is Adjunct Associate Professor at the Stern School of Business, New York University and a Principal of Global Economics Group; Evans is Executive Director of the Jevons Institute for Competition Law and Economics and Visiting Professor at the University College London, Lecturer at the University of Chicago Law School, and Chairman, Global Economics Group. The authors thank John H. Cochrane, Albert D. Metz, Richard Schmalensee, and Brian Smith for helpful insights. The views expressed are those of the authors and should not be attributed to affiliated institutions or their clients. 1 I. Summary 1. The Wheatley Review released its Initial Discussion Paper (the “Discussion Paper”) on August 10, 2012 and has sought comments on its preliminary findings and recommendations on how to reform the London Interbank Offered Rate (“LIBOR”).1 2. This submission presents an alternative to the LIBOR that would in our view: a. Eliminate or significantly reduce the severe defects in the LIBOR which lead the Discussion Paper to conclude that continuing with the current system is “not a viable option;”2 b. Provide a transparent and reliable measure of interbank lending rates during normal times as well as financial crises; c. Minimize disruptions to the market; and, d. Provide parties relying on the LIBOR with a standard that would maintain continuity with the LIBOR. 3. This alternative, which we call the “Committed” LIBOR (CLIBOR), would: a.
  • LIBOR Transition - Frequently Asked Questions

    LIBOR Transition - Frequently Asked Questions

    LIBOR Transition - Frequently Asked Questions Published: 9 January 2019 This document is a summary of the questions submitted during or following the webinar on LIBOR transition recorded on 6 December 2018 and which can be accessed at: https://www.treasurers.org/webinars/LIBORtransition In addition to the responses below, ‘What you need to know about LIBOR transition’ produced by the Working Group on Sterling Risk-Free Reference Rates; The Treasurer’s Checklist and materials on https://www.treasurers.org/liborreform are helpful resources. 1. Selection of Risk Free Rates by currency > What does SONIA stand for? > Is LIBOR cessation only for GBP? > Has a USD LIBOR alternative been selected yet? This announcement impacts all 5 LIBOR currencies: USD, GBP, JPY, EUR, CHF. Other countries are also considering changing their term benchmarks for similar reasons (e.g. BBSW in Australia). The alternative RFR (near Risk Free Rates) benchmarks that have been identified are: US: SOFR Secured Overnight Funding Rate EURO: ESTER European Short-Term Euro Rate Japan: TONAR Tokyo Overnight Average Rate Switzerland: SARON Swiss Average Rate Overnight UK: SONIA Sterling Overnight Index Average > When is the SOFR reference rate expected to be ready? > You mentioned H2-19 for the UK, what is the expected timeframe for the US SOFR benchmark? The ARRC (US working group)’s timetable and key milestones are here: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Progress-Timeline-Oct- 30.pdf More details and historic data are available at https://apps.newyorkfed.org/markets/autorates/sofr. > What does ESTER relate to? i.e. what currencies would this apply to? It relates to EUR denominated transactions.
  • Libor's Long Goodbye

    Libor's Long Goodbye

    LIBOR’S LONG GOODBYE Readiness for LIBOR transition TRANSACTIONAL POWERHOUSE 1 CASE0155238_Report_Print Ready.indd 1 21/07/2020 12:06:23 Introduction As has been noted in a continuous drumbeat of warnings from major global, regional and local regulatory bodies, LIBOR is expected to go away at the end of 2021, when the UK Financial Conduct Authority (FCA) has announced it will withdraw support for the rate. This deadline was first announced This report also includes a matrix written, in each case that mature in a speech by Andrew Bailey, chief showing an assessment of readiness after 2021. The official sector executive of the FCA, in July 2017. for transition by currency and product of regulators and central banks Since more than half of the roughly type. As we’ve noted previously, continues to stress the need to four-and-a-half-year-period that that LIBOR transition is at different develop robust alternative reference speech gave until the deadline has stages of progress in different rates and robust contractual fallbacks now elapsed, it is perhaps fitting to jurisdictions and with respect to in the event that LIBOR were to consider how far markets have come different financial products. cease or become unrepresentative in LIBOR transition, and how much of underlying financial reality, and to further they need to go. LIBOR transition remains a transition to such alternative rates. fundamental issue confronting Despite the uncertainty that exists, the This report assesses the state of financial markets. To date, transition FCA has stated firmly that the end-2021 readiness for transition from LIBOR has been slower than regulators deadline remains in effect, a statement (and other interbank offered rates would like, and considerable it reiterated on 25 March 2020 in (IBORs)) to alternative interest rates uncertainty still exists (and may response to the Covid-19 pandemic.
  • 2021: a Defining Moment for the Interest Rates Reform City Week 2020 – London

    2021: a Defining Moment for the Interest Rates Reform City Week 2020 – London

    21 September 2020 ESMA80-187-627 2021: A Defining Moment for The Interest Rates Reform City Week 2020 – London Steven Maijoor Chair European Securities and Markets Authority Introduction Good morning Ladies and Gentlemen, It is my great pleasure to participate today in the City Week 2020 forum. The interest rates reform is one of the key challenges that the global financial system is currently facing. Therefore, I would like to thank City & Financial Global and the other institutions involved in the organisation of this forum for inviting me and for including in the agenda a panel discussion on this very important matter. Today, before participating in the panel discussion, I would like to speak about recent and expected developments of the global interest rates reform and the crucial role that the cooperation between public authorities and the financial industry is playing in this process. €STR: the new risk-free rate for the euro area As Chair of a European Authority, please allow me to start with an overview of interest rates transition in the euro area and the challenges that lie ahead of us. ESMA • 201-203 rue de Bercy • CS 80910 • 75589 Paris Cedex 12 • France • Tel. +33 (0) 1 58 36 43 21 • www.esma.europa.eu We are soon approaching the first-year anniversary of the Euro Short-Term Rate, or €STR1, which has been published by the ECB since 2nd October 2019. This rate is arguably the core element of the interest rate reform in the euro area, and I will try to explain why this is the case.
  • LIBOR Transition POV with Feedback V1

    LIBOR Transition POV with Feedback V1

    LIBOR Transition A Mindtree Point of View for Banking and Financial Institutions for LIBOR Transition Context The London Interbank Offered Rate (LIBOR) is widely used in the global financial markets and is called the “world’s most important Interbank Offered Rates” with a notional value of over US$ 350 trillion globally. It is calculated and published daily in five currencies (GBP, USD, EUR, JPY, and CHF), and seven maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) by the Intercontinental Exchange Benchmark Administrator (ICE BA). In 2012, a series of allegations were raised against LIBOR for calculations, and numerous fines were imposed on several international banks. For this, the UK Government had conducted Wheatley Review that recommended: Continuing the usage of LIBOR Reforms rather than replacing them Called for a strict process to verify submissions with transaction data Market participants should play a significant role in LIBOR production and oversight Benchmark transition has been on the global agenda since 2014 and finally in 2017, the Financial Conduct Authority (FCA) examined the future of LIBOR and passed the regulation to replace LIBOR with an Alternative Risk-Free rate. LIBOR scam has also been linked to Derivatives, Bonds, Mortgages, Loans, Mutual Funds, Securities, Underwriting, Deposits Advances, Pension Funds, and Contracts worth $370 trillion. All these also need to be transitioned to a new benchmark rate wherein the Central Banks and Regulatory Authorities imposed that it would no longer persuade, or compel, banks to submit to LIBOR beyond 2021and work towards transition planning to Alternative Reference Rates (AFR’s). Let’s have a quick look into the possible Alternative Reference Rates/Risk Free Rates (ARFR) that can be made applicable, and the timelines for LIBOR Transition.
  • APAC IBOR Transition Benchmarking Study

    APAC IBOR Transition Benchmarking Study

    R E P O R T APAC IBOR Transition Benchmarking Study. July 2020 Banking & Finance. 0 0 sia-partners.com 0 0 Content 6 • Executive summary 8 • Summary of APAC IBOR transitions 9 • APAC IBOR deep dives 10 Hong Kong 11 Singapore 13 Japan 15 Australia 16 New Zealand 17 Thailand 18 Philippines 19 Indonesia 20 Malaysia 21 South Korea 22 • Benchmarking study findings 23 • Planning the next 12 months 24 • How Sia Partners can help 0 0 Editorial team. Maximilien Bouchet Domitille Mozat Ernest Yuen Nikhilesh Pagrut Joyce Chan 0 0 Foreword. Financial benchmarks play a significant role in the global financial system. They are referenced in a multitude of financial contracts, from derivatives and securities to consumer and business loans. Many interest rate benchmarks such as the London Interbank Offered Rate (LIBOR) are calculated based on submissions from a panel of banks. However, since the global financial crisis in 2008, there was a notable decline in the liquidity of the unsecured money markets combined with incidents of benchmark manipulation. In July 2013, IOSCO Principles for Financial Benchmarks have been published to improve their robustness and integrity. One year later, the Financial Stability Board Official Sector Steering Group released a report titled “Reforming Major Interest Rate Benchmarks”, recommending relevant authorities and market participants to develop and adopt appropriate alternative reference rates (ARRs), including risk- free rates (RFRs). In July 2017, the UK Financial Conduct Authority (FCA), announced that by the end of 2021 the FCA would no longer compel panel banks to submit quotes for LIBOR. And in March 2020, in response to the Covid-19 outbreak, the FCA stressed that the assumption of an end of the LIBOR publication after 2021 has not changed.
  • SIFMA Insights: SOFR Primer

    SIFMA Insights: SOFR Primer

    Executive Summary SIFMA Insights: Secured Overnight Financing Rate (SOFR) Primer The transition away from LIBOR July 2019 SIFMA Insights Page | 1 Executive Summary Contents Executive Summary ................................................................................................................................................................................... 4 The Transition Away from LIBOR ............................................................................................................................................................... 6 What is LIBOR? .......................................................................................................................................................................................... 6 Why Is LIBOR Important?........................................................................................................................................................................... 8 Why Transition to New Reference Rates, Away from LIBOR? ................................................................................................................... 9 Who Is Impacted by the Transition? ........................................................................................................................................................... 9 US Transition Plan ................................................................................................................................................................................... 11 Establishing the ARRC ............................................................................................................................................................................
  • LIBOR Transition

    LIBOR Transition

    JUNE 2021 LIBOR Transition AT A GLANCE WHAT IS LIBOR? Following guidance from the Financial Stability Board (FSB), regulatory led public/private working groups Interbank Offered Rates (IBORs), commonly referred were established to identify and promote adoption to as the London Interbank Offered Rate (LIBOR), are of robust alternate risk free rates (ARFRs) that were systemically important interest rate benchmarks, aimed based on substantial underlying transactions to at providing an indication of the average rates at which replace the various LIBOR currency rates. Most RFRs banks can obtain unsecured funding from each other were created as a response to the end of LIBOR; while in various currencies. Various regulatory authorities SONIA, which was historically referenced on overnight have announced their support for a reduced reliance on transactions, was reformed. IBORs, with cessation dates starting at the end of 2021, detailed in Figure 1. LIBOR has often been used in the industry as an interest rate benchmark rate for various LIBOR VERSUS RFR financial products ranging from capital markets to lending products including mortgages. LIBOR RFR In addition to LIBOR cessation, other benchmarks Term Term rate An overnight rate such as EONIA (Euro Overnight Index Average) will be benchmark e.g. (with no existing ceasing publication on 3 January 2022 and there are 3M, 6M, 1Y term structure)1 a number of other benchmarks that reference LIBOR in their calculations, which will be reformed, including View Forward-looking Backward-looking SOR (Singapore Dollar Offer Rate) and THBFIX (Thai Baht Fix). Secured? Unsecured Some based on a secured overnight rate, others WHAT ARE RISK FREE RATES (RFRS)? unsecured RFRs are interest rate benchmarks that seek to Credit Risk Embedded credit Near to risk free, measure the overnight cost of borrowing cash by risk component as there is no bank banks, underpinned by actual transactions.
  • Life After Libor

    Life After Libor

    October 2019 TOPIC OF FOCUS: REGULATORY LIFE AFTER LIBOR On the Web: https://wam.gt/2BRKmQR LIBOR is one of the most important interest rates in the world, with fnancial products of about $200 trillion tied to its benchmark rate. But LIBOR is being phased out in 2021 and the transition to a new reference rate will be a major undertaking for fnancial institutions great and small. Here we provide a high-level overview of the situation based on the facts available today and provide guidance regarding the upcoming transition from and likely replacements to LIBOR. KEY TAKEAWAYS LIBOR is one of the world’s most widely used fnancial benchmarks for short-term interest rates and determines the rate for unsecured short-term borrowing between banks. LIBOR will be phased out at the end of 2021 and the transition to a new reference rate will be a major undertaking for many fnancial institutions. Due to the vast number of fnancial vehicles tied to LIBOR, it will be replaced by several diferent indices that will serve the same function going forward. Several working groups around the world have been researching their respective Thomas McMahon Product Specialist recommendations to replace LIBOR for their local markets. Western Asset is monitoring the situation closely, and providing this summary of the status of the LIBOR retirement to help investors and fnancial professionals best prepare for the transition ahead. © Western Asset Management Company, LLC 2019. This publication is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended recipients.
  • A Quick Guide to the Transition to Risk-Free Rates in the International Bond Market

    A Quick Guide to the Transition to Risk-Free Rates in the International Bond Market

    A quick guide to the transition to risk-free rates in the international bond market 27 February 2020 A quick guide to the transition to risk-free rates in the international bond market February 2020 1 Disclaimer This paper is provided for information purposes only and should not be relied upon as legal, financial, or other professional advice. While the information contained herein is taken from sources believed to be reliable, ICMA does not represent or warrant that it is accurate or complete and neither ICMA, nor its employees, shall have any liability arising from or relating to the use of this publication or its contents. © International Capital Market Association (ICMA), Zurich, 2020. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission from ICMA. A quick guide to the transition to risk-free rates in the international bond market February 2020 2 Introduction This Quick Guide is intended to highlight the key issues on which ICMA is focused in the transition from IBORs to alternative near risk-free reference rates (“RFRs”) in the international bond market (including floating rate notes (“FRNs”), covered bonds, capital securities, securitisations and structured products, together, “bonds”); and provide links to relevant resources. More information is available on the ICMA benchmark reform and transition to RFRs webpage and from the ICMA contacts listed below. This Quick Guide reflects the position as at its date, but market participants should note that there
  • The Discontinuation of Ibors and Its Impact on Islamic and Uae Transactions

    The Discontinuation of Ibors and Its Impact on Islamic and Uae Transactions

    June 14, 2021 THE DISCONTINUATION OF IBORS AND ITS IMPACT ON ISLAMIC AND UAE TRANSACTIONS To Our Clients and Friends: 1. Introduction When calculating interest rates for floating rate loans or other instruments, the interest rate has historically been made up of (i) a margin element, and (ii) an inter-bank offered rate (IBOR) such as the London Inter-Bank Offered Rate (LIBOR) as a proxy for the cost of funds for the lender. As a result of certain issues with IBORs, the loan market is shifting away from legacy IBORs and moving towards alternative benchmark rates that are risk free rates (RFRs) that are based on active, underlying transactions. Regulators and policymakers around the world remain focused on encouraging market participants to no longer rely on the IBORs after certain applicable dates (the Cessation Date) – 31 December 2021 is the Cessation Date for CHF LIBOR, GBP LIBOR, EUR LIBOR, JPY LIBOR and the 1 week and 2 month tenors of USD LIBOR, while 30 June 2023 is the Cessation Date for the remaining tenors of USD LIBOR (overnight, 1, 3, 6 and 12 month tenors). Other IBORs in other jurisdictions may have different cessation dates (e.g. SIBOR) while others may continue (e.g. EIBOR). Market participants should be aware of these forthcoming changes and make appropriate preparations now to avoid uncertainty in their financing agreements or other contracts. 2. What will replace IBORs? Regulators have been urging market participants to replace IBORs with recommended RFRs which tend to be backward-looking overnight reference rates - in contrast to IBORs which are forward-looking with a fixed term element (for example, LIBOR is quoted as an annualised interest rate for fixed periods e.g.