Interbank Offered Rate (IBOR) and Benchmark Reform Frequently Asked Questions
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Interbank Offered Rates (Ibors) and Alternative Reference Rates (Arrs)
VERSION: 24 SEPTEMBER 2020 Interbank Offered Rates (IBORs) and Alternative Reference Rates (ARRs) The following table has been compiled on the basis of publicly available information. Whilst reasonable care has been taken to ensure that the information in the table is accurate as at the date that the table was last revised, no warranty or representation is given as to the information in the table. The information in the table is a summary, is not exhaustive and is subject to change. Key Multiple-rate approach (IBOR + RFR) Moving to RFR only IBOR only Basis on Development of Expected/ Expected fall which forward-looking likely fall- back rate to IBOR is Expected ARR? back rate to the ARR (if 3 Expected being Date from date by the IBOR2 applicable) discontinu continued which which ation date (if Alternative ARR will replaceme for IBOR applicable Reference be nt of IBOR Currency IBOR (if any) )1 Rate published is needed ARS BAIBAR TBC TBC TBC TBC TBC TBC TBC (Argentina) 1 Information in this column is taken from Financial Stability Board “Reforming major interest rate benchmarks” progress reports and other publicly available English language sources. 2 This column sets out current expectations based on publicly available information but in many cases no formal decisions have been taken or announcements made. This column will be revisited and revised following publication of the ISDA 2020 IBOR Fallbacks Protocol. References in this column to a rate being “Adjusted” are to such rate with adjustments being made (i) to reflect the fact that the applicable ARR may be an overnight rate while the IBOR rate will be a term rate and (ii) to add a spread. -
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 Key Dates
IBOR Reform Key Dates July 2021 Disclaimer J.P.Morgan does not provide legal, tax, financial or accounting advice and clients should consider any loan amendments and the appropriateness of the fallbacks incorporated therein together with their legal, tax, financial and accounting advisers, taking into consideration their own particular circumstances and the fallbacks that may be applicable in any related products. Please visit the following link for JPMorgan disclosures: https://www.jpmorgan.com/global/disclosures Key IBOR Transition Dates Currency IBOR Settings Permanent Cessation Date1 Cease Trading New IBOR Contracts Select Milestones LIBOR (1-week and 2-month) December 31, 2021 FRB/FDIC/OCC: The agencies encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31st, 2021. The Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) Interest Rate Benchmark Reform Subcommittee: ◼ Recommends that on July 26th, 2021 and thereafter, that USD End 2021 (All Products) interdealer trading conventions switch from LIBOR to the LIBOR (Overnight, 1-month, 3- June 30, 2023 Secured Overnight Financing Rate (SOFR) for USD linear month, 6-month, 12-month) interest rate swaps. This is referred to as “SOFR First”. ◼ The SOFR First initiative also recommends keeping interdealer brokers’ screens for LIBOR linear swaps available until October 22nd, 2021, but for information purposes only. After this date, these screens should be turned off. -
B. Recent Changes in the Financial Secto R
- 21 - References Calvo, Gullermo A.,1983, “Staggered Prices in a Utility-Maximizing Framework,” Journal of Monetary Economics, Vol. 12(3), 383–398. Gali, Jordi, and Mark Gertler, 1999, “Inflation Dynamics: A Structural Econometric Analysis,” Journal of Monetary Economics, Vol. 44(2), 195–222. Kara, Amit, and Edward Nelson, 2004, “The Exchange Rate and Inflation in the U.K.,” CEPR Discussion Papers No. 3783. Roberts, John M.,1995, “New Keynesian Economics and the Phillips Curve,” Journal of Money, Credit, and Banking, Vol. 27(4), 975–984. Walsh, Carl E., 2003, Monetary Theory and Policy, 2nd Edition, Cambridge, The MIT Press. - 22 - 1 III. FINANCIAL SECTOR STRENGTHS AND VULNERABILITIES—AN UPDATE A. Introduction 1. This chapter reports on strengths and vulnerabilities that may have developed in the financial system since the time of the Latvia Financial System Stability Assessment (IMF Country Report No. 02/67), and discusses measures available to the authorities for further strengthening of the system. The FSSA found that the banking system was well capitalized, profitable and liquid. It was “fairly resilient” to interest rate increases, rapid credit expansion and possible withdrawal of nonresident deposits. The FSSA recommended continued vigilance by banks and the Financial and Capital Markets Commission (FCMC) to ensure that new vulnerabilities did not develop in these areas. Nonbank financial institutions were judged not large enough to be a source of systemic risk. Supervision and regulation were judged to be robust. 2. The present assessment is based mainly on an analysis of financial soundness indicators, including macroeconomic indicators such as inflation, and on stress tests of the financial system. -
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. -
LIBOR Transition Market Update: July 16
LIBOR Transition Market update: July 16 - 31, 2020 518 days to December 31, 2021 1 - Highlights - €STR discounting switch in the books 1 Highlights — SOFR up next €STR discounting switch in the books — SOFR up next - ECB report: banks generally behind What happened? A key milestone in the transition to new schedule RFRs in the Euro markets has been completed, as the central - ARRC’s syndicated loan conventions: counterparty (CCP) clearinghouses have switched from Choose your own adventure? EONIA to €STR as the rate for calculation of price alignment interest (the interest paid on collateral) for EUR-denominated - EC legislative proposal to address interest rate swaps and consequently discounting future cash legacy contracts that cannot be flows. Indications are that the switch was accomplished transitioned without major issues. - ECB’s plans to publish compound €STR The eyes of the financial world now turn to the USD averages derivatives markets, as market participants prepare for the corresponding switch for cleared USD interest rate derivatives - SIBOR no more? SORA proposed as from the effective federal funds rate (EFFR) to SOFR, main benchmark in Singapore scheduled for the weekend of October 17, 2020. At the CFTC’s last Market Risk Advisory Committee (MRAC) 2 – RFR adoption: Derivatives meeting, the subcommittee on interest rate benchmark reform delivered a report summarizing the learnings from a recent - Futures and options tabletop exercise on the discounting switch conducted earlier - Swaps trading this year: - Enhanced education is needed for all involved parties. 3 – RFR adoption: Cash products - Risk mitigation strategies should be considered in advance of the discounting switch. -
LIBOR Transition - Impacts to Corporate Treasury
LIBOR Transition - Impacts to Corporate Treasury April 2019 What is happening to LIBOR? London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for unsecured loans of varying tenors. In 2017, Financial Conduct Authority stated that it will no longer compel banks to submit LIBOR data to the rate administrator post 2021 resulting in a clear impetus and need to implement alternative risk-free rates (RFR) benchmarks globally. End of LIBOR LIBOR transition 2019 - 2021 Post 2021 Risk-free rates SOFR (U.S.) LIBOR (RFR) Phase-out RFRs • an unsecured rate at which banks and SONIA (U.K.) • rates based on secured or unsecured ostensibly borrow from one another transactions replace ESTER (E.U.) • a rate of multiple maturities with… • overnight rates • a single rate Other RFRs… • different rates across jurisdictions How about HIBOR? Unlike LIBOR, the HKMA currently has no plan to discontinue HIBOR. The Treasury Market Association (TMA) has proposed to adopt the HKD Overnight Index Average (HONIA) as RFR for a contingent fallback and will consult industry stakeholders later in 2019. © 2019 KPMG Advisory (Hong Kong) Limited, a Hong Kong limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Hong Kong. 2 How do I know who is impacted? Do you have any floating rate Do you have any derivative loans, bonds, or other similar contracts (e.g. interest rate Do you need to calculate financialEnsure they instruments have difficult with swap) with an interest leg market value of financial an interestconversations rate referenced to referenced to LIBOR? positions (e.g. -
Reform of Interest Rate Benchmarks for Q4 2019
Annex 1 Results of Survey on Reform of Interest Rate Benchmarks for Q4 2019 1. Hong Kong banking sector’s exposures referencing LIBOR (LIBOR exposures) (HK$ trillion, as at end-September 2019) Assets Liabilities Derivatives Total amount of LIBOR exposures (note) $4.5 $1.6 $34.6 as a % of total assets or liabilities denominated in 30% 11% N/A foreign currencies LIBOR exposures which will mature after end-2021 $1.5 $0.5 $16.1 of which without adequate fall-back $1.4 $0.5 $14.7 outstanding amount as a % of total LIBOR assets, liabilities or derivatives 33% 32% 46% Note: Includes exposures referencing LIBOR in five currencies (i.e. USD, EUR, GBP, JPY and CHF), as well as benchmarks calculated based on LIBOR, including Singapore Dollar Swap Offer Rate (SOR), Thai Baht Interest Rate Fixing (THBFIX), Mumbai Interbank Forward Offer Rate (MIFOR) and Philippine Interbank Reference Rate (PHIREF). 2. Hong Kong banking sector’s exposures referencing HIBOR (HIBOR exposures) (HK$ trillion, as at end-September 2019) Assets Liabilities Derivatives Total amount of HIBOR exposures $4.7 $0.2 $12.2 as a % of total assets or liabilities denominated in HKD 49% 2% N/A 3. AIs’ preparation for transition to alternative reference rates (ARRs) Key components in AIs’ preparatory work for transition to ARRs % AIs having the component in place Establishment of a steering committee and/or appointment of a 63% senior executive for overseeing the preparation for transition Development of a bank-wide transition plan 38% Quantification and monitoring of LIBOR exposures 48% Impact assessment across businesses and functions 42% Identification and evaluation of risk associated with the transition 38% Identification of affected IT systems and development of a plan to 39% upgrade these systems Identification of affected internal models and development of a plan 36% to modify these models Development of a plan to introduce ARR products 28% Development of a plan to reduce LIBOR exposures 25% Development of a plan to renegotiate LIBOR-linked contracts 24% 4. -
Reforming Major Interest Rate Benchmarks: Progress Report
Reforming major interest rate benchmarks Progress report 14 November 2018 The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard-setting bodies in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. Its mandate is set out in the FSB Charter, which governs the policymaking and related activities of the FSB. These activities, including any decisions reached in their context, shall not be binding or give rise to any legal rights or obligations under the FSB’s Articles of Association. Contacting the Financial Stability Board Sign up for e-mail alerts: www.fsb.org/emailalert Follow the FSB on Twitter: @FinStbBoard E-mail the FSB at: [email protected] Copyright © 2018 Financial Stability Board. Please refer to: http://www.fsb.org/terms_conditions/ ii Contents Page Abbreviations and Acronyms ................................................................................................. iv Executive Summary ................................................................................................................. 1 1. International coordination and key cross-jurisdictional themes ........................... 3 1.1 Overview ...................................................................................................................... 3 1.2 Issues related to divergence between IBORs ............................................................... 4 1.3 Approach to -
My Company Has an Existing Loan That References SOR and Matures After End 2021
PUBLIC FRENQUENTLY ASKED QUESTIONS FAQs FOR CORPORATES LOANS – EXISTING/LEGACY Q1: My company has an existing loan that references SOR and matures after end 2021. What should I do about this? There is no immediate impact on your loan at this juncture, and your bank will be reaching out to you in due course to assist with the transition. However, to prepare for the upcoming transition, you are encouraged to review the terms and conditions of your loan contract to understand the implications and the actions required. Q2. Can my bank just replace my SOR loan pricing to SIBOR (or enhanced SIBOR)? Your bank will be writing to you at the appropriate time to consider different options. You will have the ability to choose the right loan package that best meets your needs. You will also need to consider if replacing a SOR loan with other benchmarks impacts your related transactions (e.g. hedges) and the corresponding accounting and tax implications. SORA and SIBOR are different SGD benchmarks that are determined on a different basis. In relation to the usage of SIBOR, ABS Benchmarks Administration Pte Ltd (ABS Co) is conducting a transitional testing for the enhanced SIBOR, and will provide an update after the transitional testing is completed in 2H 2020. The results of the transitional testing will be considered by the Steering Committee for SOR Transition to SORA (SC-STS), which will issue industry guidance in due course. While SORA is not commonly used in the loan market, it is not new and has been published daily by the MAS since 2005. -
Eurodollar Futures, and Forwards
5 Eurodollar Futures, and Forwards In this chapter we will learn about • Eurodollar Deposits • Eurodollar Futures Contracts, • Hedging strategies using ED Futures, • Forward Rate Agreements, • Pricing FRAs. • Hedging FRAs using ED Futures, • Constructing the Libor Zero Curve from ED deposit rates and ED Fu- tures. 5.1 EURODOLLAR DEPOSITS As discussed in chapter 2, Eurodollar (ED) deposits are dollar deposits main- tained outside the USA. They are exempt from Federal Reserve regulations that apply to domestic deposit markets. The interest rate that applies to ED deposits in interbank transactions is the LIBOR rate. The LIBOR spot market has maturities from a few days to 10 years but liquidity is the greatest 69 70 CHAPTER 5: EURODOLLAR FUTURES AND FORWARDS Table 5.1 LIBOR spot rates Dates 7day 1mth. 3mth 6mth 9mth 1yr LIBOR 1.000 1.100 1.160 1.165 1.205 1.337 within one year. Table 5.1 shows LIBOR spot rates over a year as of January 14th 2004. In the ED deposit market, deposits are traded between banks for ranges of maturities. If one million dollars is borrowed for 45 days at a LIBOR rate of 5.25%, the interest is 45 Interest = 1m × 0.0525 = $6562.50 360 The rate quoted assumes settlement will occur two days after the trade. Banks are willing to lend money to firms at the Libor rate provided their credit is comparable to these strong banks. If their credit is weaker, then the lending bank may quote a rate as a spread over the Libor rate. 5.2 THE TED SPREAD Banks that offer LIBOR deposits have the potential to default. -
An Empirical Study on the Linkage Between Offshore and Onshore
2017 2nd International Conference on Modern Economic Development and Environment Protection (ICMED 2017) ISBN: 978-1-60595-518-6 An Empirical Study on the Linkage Between Offshore and Onshore Interbank Offered Rate Wen-wen ZENG Nanjing University of Science and Technology, Nanjing, Jiangsu, China [email protected] Keywords: CNH-HIBOR, SHIBOR, Linkage, VAR Model. Abstract. This article uses Granger causality test and vector autoregression model to investigate the linkage between SHIBOR and CNH-HIBOR. The results showed that the existence of linkage between two short-term varieties, long-term varieties did not show linkage, and the offshore market has an impact on the onshore market, short-term maturity varieties respond more rapidly to impacts, while long-term maturity varieties respond to impacts that take a long time to digest. The results show that the linkage between China’s inter-bank lending rate and the onshore market is gradually increasing, it’s need to further strengthen SHIBOR’S s the basic position, and constantly improve the quotation mechanism and relax offshore market restrictions. 1. Introduction CNH-Hongkong Inter-bank Offered Rate (CNH-HIBOR) reflects the interest rate level of the offshore RMB market. If the offshore market and onshore market interest rates spread too much, it can easily lead to arbitrage, which is not conducive to the stability and security of the market economy stability and security. Therefore, studying the linkage of inter-bank lending rates will be conducive to promoting marketization of interest rates. The domestic research on the inter-bank lending rate mainly focuses on three aspects: factors that influence the inter-bank lending rate [1]; benchmark interest rate [2,3]; volatility of the inter-bank lending rates [4-7].