Ibor Transition Clifford Chance

IIFM AWARENESS SEMINAR ON ISLAMIC FINANCE GLOBAL BENCHMARK REFORM

HABIB MOTANI CLIFFORD CHANCE SEPTEMBER 2019

THE BACKGROUND TO IBOR REFORM AND RECENT DEVELOPMENTS

1 ALTERNATIVES TO LIBOR

Alternative Publication Overnight Rate Term Rate Currency Administrator Working Group Secured? Description Reference Rate time Available? Available?

GBP Unsecured overnight rate Reformed based on the rate at which Working Group on SONIA (Sterling Bank of 09:00 GMT, interest is paid on sterling Sterling Risk-Free  Overnight Index England  T+1 short-term wholesale funds P Reference Rates Planned Q1 2020 Average) where credit, liquidity and other risks are minimal

USD SOFR (Secured Federal Alternative Secured rate based on Overnight Reserve Bank Reference Rates P 08:00 ET, T+1 transactions in the US P  Financing Rate) of New York Committee (ARRC) Treasury repo market Planned H2 2021

JPY Unsecured rate based on TONAR (Tokyo Study Group on 10:00 JST, uncollateralised overnight Overnight Bank of Japan Risk-Free   T+1 call rate market P Average Rate) Reference Rates Under consideration transactions

CHF National Working  SARON (Sales 12:00, 16:00 Group on Swiss Secured rate based on data A robust Average Rate SIX Exchange and 18:00 CET Franc Reference P from the Swiss repo market P derivatives-based Overnight) same day Rates term rate is unlikely to be feasible €STR Euro Unsecured rate to reflect (European Working Group on wholesale euro unsecured Short-Term Euro European Risk-Free 09:00 CET, overnight borrowing   Rate) – Central Bank Reference Rates for  T+1 transactions with financial 2 October 2019 Under consultation alternative rate the Euro Area counterparties to EONIA

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PROGRESS WITH IBOR REFORM

Canadian Dollar Sterling Euro Bank of Canada BoE WG on Risk-Free Rates Europe WG on Risk-Free Reference Rates

Canadian Dollar LIBOR Discontinued Sterling LIBOR SONIA (Bank of England) EURIBOR Reformed EURIBOR?

Canadian Dollar Offered CDOR together with a term EONIA €STR Rate (CDOR) risk-free rate such as CORRA (Thomson Reuters)

US Dollar Japanese Yen US Alternative Reference Rates Committee (ARRC) Japan Study Group on Risk-Free Rates

US Dollar LIBOR SOFR (NY Fed) JPY LIBOR TONAR (BoJ)

JPY TIBOR Reformed TIBOR (JBATA)

Swiss franc Swiss National WG on CHF reference rates Hong Kong Dollar HKMA CHF LIBOR SARON (SIX Swiss Exchange/SNB) HIBOR HONIA Consultation (Treasury Markets Association) Swedish krona Swedish Bankers' Association SEK LIBOR Discontinued

Stockholm Interbank STIBOR together with Offered Rate (STIBOR) (potentially) a term risk-free rate Singapore Dollar Australian Dollar Association of Banks in Singapore (ABS), Singapore Reserve Bank of Australia Foreign Exchange Market Committee, MAS Key: Australian Dollar LIBOR Discontinued Old/IBOR rate New rate SIBOR Reformed SIBOR or alternative rate? (ABS) BBSW Reformed BBSW (ASX)

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2 EU BENCHMARKS REGULATION

The European Benchmarks Regulation (BMR) imposes certain requirements on users of benchmarks that are supervised entities.

Supervised entities Types of Supervised Entities

• not allowed to ‘use’ a benchmark in the • Credit institutions, investment firms sense of the BMR unless benchmark is • Insurance and reinsurance undertakings BMR compliant • UCITS, UCITS managers, AIFMs, IORPs • must have robust contingency plans in case benchmarks used by them materially • Creditors under (retail) change or cease to be produced “financial contracts” • CCPs, CSDs, trade repositories, • include clear and prominent information in market operators relevant prospectuses stating whether the benchmark is provided by an • Benchmark administrators. administrator on ESMA’s register

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POTENTIAL ISSUES WITH RFRS

Credit Spread Value Transfer Basis Risk Operational Issues

• RFRs are historically lower • Risk of value transfer when • Deviation in approach • Institutional infrastructure than IBORs. fallbacks are triggered between cash products required to support (and on incorporation into and derivatives used to the transition. • How will the credit spread legacy contracts). hedge them. adjustment be calculated? • Costly and time consuming • Risk of disputes. • Potential impact on to implement. hedge accounting and tax.

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3 POTENTIAL ISSUES WITH RFRS (CONTINUED)

Consistency Forward v Overnight Rate v across Backward Term Rate products and Looking currencies Rates

• Derivatives markets v • Timing for calculation of • Ability for borrowers/issuers cash markets. various RFRs. to manage cashflow.

• Potential use case for term • Compounding vs average rates in loan market. calculation method.

• Timing for implementation.

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Habib Motani Clifford Chance London

+44 2070061718 [email protected]

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