SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx
LIBOR Transition
A practical guide
December 2020 Edition
December, 2020 1 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx
Table of Contents
1. LIBOR Transition: Executive Summary______4 What does this document seek to do? ______4 Summary ______4 Practical considerations checklist ______4 Key highlights ______4 What's next? ______4
2. LIBOR Transition: Facts and Figures ______5 What is LIBOR? ______5 Where is LIBOR used? ______5 What is happening to LIBOR and by when? ______5 What has the response been to date? ______6 What are the main Alternative Reference Rates? ______6 How do these ARRs differ to LIBOR? ______8 Are these ARRs secured or unsecured? ______8 Will the ARRs have forward looking term structures? ______8 What are ARR Compounded Index Rates? ______8 What about the other IBOR Benchmark Rates? ______9 Summary and Practical Considerations ______9
3. LIBOR Transition: Discounting Risk ______10 What is discounting risk? ______10 What changes have the CCPs made? ______10 What are the implications for CSAs? ______10 Why will these changes drive an increased Bilateral Negotiation of CSAs? ______10 When will UBS be ready to open CSA negotiations? ______11 What is the impact on swaption contracts? ______11 Summary and Practical Considerations ______11
4. LIBOR Transition: Forecasting Risk ______12 What is Forecasting Risk? ______12 What are the Fallback Provisions? ______12 What are some examples of differing fallback methods? ______13 How will the LIBOR transition affect new contracts executed under the updated ISDA Definitions?13 How will the LIBOR transition affect the existing contracts? ______13
2 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx What is expected to happen to cleared contracts? ______14 How will the LIBOR transition affect products other than OTC derivatives? ______14 How could hedge effectiveness across asset classes via linked transactions be affected by the LIBOR transition? ______14 What is the ISDA LIBOR to ARR adjustment? ______14 What are the ARRC's recommended best practices? ______14 What is Pre-Cessation? ______15 What is 'Synthetic LIBOR'? ______15 What are the implications of 'Synthetic LIBOR' on Transition? ______15 What are the latest expected publication dates for LIBOR?______16 Why is the Transition challenging for certain products? ______16 Why might these Forecasting Risk changes drive increased bilateral/ multilateral negotiation? __ 16 What are the main drivers that may determine the impact on Forecasting Risk? ______16 Summary and Practical Considerations ______17
5. Regulatory and Market Milestones ______18
6. Regulatory and Market Milestones Continued ______19
7. Appendix ______20 ARRC Recommended Best Practices ______20 FINMA’s Recommendations and Transition Roadmap for 2021 ______21 BoE RFR Working Group - Revised target milestones to manage transition away from Sterling LIBOR linked products by end 2021 ______23 Other IBORs Benchmark Rates ______25 Overnight Index Swap Industry Definitions ______28 ARR detailed information ______28
8. Bibliography ______29
9. Glossary ______31
10. Disclaimer ______32
11. Contact information ______33
3 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 1. LIBOR Transition: Executive Summary
What does this document seek to do? This guide aims to give UBS clients an understanding of the LIBOR transition and highlights the practical considerations that should be taken into account. This communication is not sent to you in connection with any wealth management, corporate or institutional client or asset management relationship you may have with UBS. Summary Regulators have announced that the market should stop relying on LIBOR. Each of the Alternative Reference Rates (ARRs) for the five major currencies (USD, EUR, GBP, CHF, JPY) involved is at a different stage in terms of development and liquidity. Other currencies' alternative rates are also being developed but the initial focus has been on these five. The industry needs to understand, prepare and execute with respect to this market change. LIBOR is used as a reference rate in a multitude of products and links, for example between a derivative and an underlying asset, need to be considered in order to understand potential basis risk between LIBOR and the new ARR. In addition to migration of transactions, industry changes in discounting methodology are underway and changes in technology systems may be required. UBS aims to keep clients informed of these changes and is running an extensive internal change programme focussed on this transition. Note that EURIBOR and TIBOR are expected to remain in the medium term so industry focus is on the other rates. Practical considerations checklist • Understand what this change means for you: – Analyse the exposure you currently have to LIBOR and assess the potential financial impact – Ensure you know where you have transactions which you believe to be linked (see Forecasting Risk Section) – Review the fallback language in your Legal Documentation (see Forecasting Risk Section) • Review your readiness: – Evaluate whether you need to make any changes to your risk management systems – In addition, consider any operational processes you may need to update, for example ensuring all reference data sources are updated accordingly – Consider consolidating your LIBOR exposure to reduce the number of bi-lateral transitions required Key highlights Facts and Figures Discounting Risk Forecasting Risk • 5 ARRs have been identified • Discounting rate and interest paid • Updated ISDA Definitions and IBOR to replace the 5 LIBOR on collateral usually aligned Fallbacks Protocol were published currencies • CCPs have now switched 23 October 2020 and become • Each ARR is an overnight rate discounting rates to ARRs and this effective on 25 January 2021 • The ARRs are backward is likely to be a key driver for • Differences in fallback methodology looking rates increased adoption of ARRs across different product types may • Adjustment methodology across the industry impact hedge effectiveness across agreed to address the • Any changes to the margin annex transactions believed to be linked differences (term and credit) for a derivative contract should • Evaluation of current contractual between LIBOR and ARRs reference the new ARR to replace fallback provisions may lead to existing cash margin rate increased bilateral discussion
What's next? When relevant, UBS will be contacting you in due course on the following topics: • Trades with UBS referencing LIBOR; • Contracts with UBS which reference a transitioning benchmark If you have any further questions, in the first instance please contact your sales representative. Alternatively, please get in touch via [email protected].
4 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 2. LIBOR Transition: Facts and Figures
What is LIBOR? The London Interbank Offered Rate (LIBOR) is calculated from submissions by selected "panel" banks1 of the rates they either pay or would expect to pay to borrow from one another. LIBOR is a widely-used interest rate benchmark. Rates are determined daily by the LIBOR administrator, the ICE Benchmark Administration (IBA), for various currencies (USD, EUR, GBP, CHF, JPY) and tenors (Overnight, 1w, 1m, 2m, 3m, 6m and 12m).
Where is LIBOR used? According to IBA, LIBOR is used to determine periodic interest payments for many hundreds of trillions of notional of financial products globally, and is used for example in derivatives, bonds, structured products, securitised products and loans. What is happening to LIBOR and by when? Just over a decade ago, the market's perception of an increase in inter-bank credit risk inherently contained within LIBOR led to a widening of the basis between LIBOR and short-term interest rate futures. Financial institutions began to switch from using LIBOR to Overnight Index Swap rate (OIS) for discounting purposes, which was seen as being closer to a risk-free rate. At the same time, liquidity in the unsecured lending market, which underpins LIBOR, declined as banks became increasingly unwilling to lend to one another on an unsecured basis. The concern was that a lending rate, based on an increasingly less liquid market, was being used to reference many multiples of financial contracts. As a result, in 2017, the FCA announced that the market should transition to alternative reference rates based firmly on transactions, with panel bank support for current LIBOR to continue for a finite length of time. Despite market-driven transition challenges triggered by the COVID-19 pandemic, the FCA2 has stated that the transition away from LIBOR still needs to happen by the time LIBOR ceases to be available.
1 https://www.theice.com/iba/libor#methodology 2 https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans
5 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx What has the response been to date? In response to these concerns on LIBOR, the Financial Stability Board's (FSB) review produced the basis for the 19 principles developed by the International Organization of Securities Commissions (IOSCO) 3. One of the key IOSCO principles was that a new "representative" benchmark reference rate should wherever possible be based on transactions and not expert judgement. Since the initial FCA statement in 20174, national working groups (see Forecasting Risk section) have been set up with the support of regulators and central banks with broad industry and market representation. These working groups have recommended alternative benchmarks for each of the LIBOR currencies. These alternatives are viewed as more robust benchmarks, compliant with IOSCO principles and are underpinned by larger volumes of observable transactions. It is expected that alternative reference rates (ARRs) with compounding in arrears will be a common feature of trades in the future. It is also expected that a term rate variation will also become available for SONIA and SOFR.
What are the main Alternative Reference Rates? Different jurisdictions have developed different methodologies for their new ARRs, and as illustrated in the timelines in the Appendix, these are all at different stages in terms of market liquidity and development. These ARRs are managed by different administrators, as outlined below.
Underlying Legacy transactions Reference Secured vs Rate Jurisdiction Working Group Rate Target ARR Unsecured Administrator Comments US Alternative USD LIBOR Secured Secured Federal Reserve There are Reference Rates Overnight Bank of ongoing Committee Financing Rate New York discussions (ARRC) (SOFR) regarding a credit sensitive index for the US market UK Working group GBP LIBOR Sterling Unsecured Bank of England on Sterling Risk- Overnight Index Free Reference Average (SONIA) Rates Euro Area Working Group EONIA1 Euro Short Term Unsecured European Reformed on Euro Risk- Rate (€STR) Central Bank EURIBOR is Free Rates expected to continue alongside €STR as a multiple rate approach. The European Commission has expressed confidence in EURIBOR for the medium term Switzerland The National CHF LIBOR Swiss Average Secured SIX Swiss Working Group Rate Overnight Exchange on Swiss Franc (SARON) Reference Rates
3 https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf 4 https://www.fca.org.uk/news/speeches/the-future-of-libor
6 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx Underlying Legacy transactions Reference Secured vs Rate Jurisdiction Working Group Rate Target ARR Unsecured Administrator Comments Japan Cross-Industry JPY LIBOR Tokyo Overnight Unsecured Bank of Japan Multi rate Committee on Average Rate approach Japanese Yen (TONA) planned with Interest Rate TIBOR (but Benchmarks Euroyen TIBOR may discontinue)
Note: 1 This is not an IBOR, however it is being replaced by an ARR. EUR LIBOR has not been referenced as its role as a benchmark is dwarfed by the use of EONIA or EURIBOR. Please see the Appendix for ARR detailed Information.
7 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx How do these ARRs differ to LIBOR? The ARRs are structurally different from LIBOR and are not economic equivalents.
Components LIBOR ARRs Methodology Based on a waterfall methodology SOFR, SONIA, €STR, SARON and TONA are incorporating real transactions but also anchored in real transactions expert judgement Term Published for 7 maturities from overnight up Currently only available overnight, however note to one year that central banks and SIX have begun to publish indices to limit the amount of daily compounding calculations required for market participants Credit Risk Includes a risk adjustment to account for There is minimal credit spread adjustment as the Adjustment interbank credit spread and tenor ARRs are overnight rates and some ARRs are secured Rate The rate is set at the beginning of the period The rate is based on daily observations and is only known at the end of the period Settlement Paid at end of period There are a variety of conventions used in the Conventions calculation of cashflows dependent on backward looking rates: • Compounding of the overnight ARR over the payment period • Averaging of the overnight ARR over the payment period • Lockout • Backward Shift or Lookback Please see Appendix Overnight Index Swap Industry Definitions for further information on the above
These differences may mean market participants’ risk management systems might require enhancements to manage the different conventions which are used to calculate payments. Are these ARRs secured or unsecured? Some of the ARRs are secured rates, i.e. calculated from observed repurchase agreements (repos) collateralized by government bonds. This applies to SARON for CHF and SOFR for USD. The others are unsecured like LIBOR, i.e. based on unsecured borrowing with no actual underlying security. LIBOR differs from these unsecured ARRs as it is based not only on observed interbank borrowing transactions but also expert judgement. Will the ARRs have forward looking term structures? The ARRs developed to-date are overnight rates. There are ongoing efforts to develop forward looking term structures for the ARRs (except for SARON), the most advanced of these is in SONIA where there is sufficient depth in the ARR derivatives market in order to be able to calculate the rate. It is also expected that a SOFR term rate will be available for use by mid-2021.
What are ARR Compounded Index Rates? An alternative to forward-looking term structures is to provide the result of compounding a rate over a period (such as 30, 90, 180 days) and publishing these as indices. This action may assist some market participants to adopt these rates as it can limit the amount of daily compounding calculations required. Currently these indices are being published for SOFR by the Federal Reserve, SARON by the SIX Swiss Exchange & SONIA by the Bank of England.
8 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx What about the other IBOR Benchmark Rates? The initial focus has been on the five ARRs detailed above. In due course other alternative rates may be developed. See Appendix Other IBORs Benchmark Rates for selected examples of those currently under review.
Summary and Practical Considerations Below are some of the practical considerations clients should take into consideration for this LIBOR transition
Summary Practical Considerations include
• 5 ARRs have been identified to replace the 5 LIBOR • Evaluate whether you need to make any changes to currencies your risk management systems, specifically to ensure that you are able to trade, manage and settle • The ARRs are currently only overnight rates; term transactions referencing a backward looking rates may become available in some currencies in the compounded (or simple averaged) rate as opposed future to a forward looking term rate • The ARRs are generally published the following day • The methodology to calculate an adjustment to replace LIBOR with an ARR (to address the term and credit differences) has been agreed by ISDA If you have any further questions, in the first instance please contact your sales representative. Alternatively, please get in touch via [email protected].
9 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 3. LIBOR Transition: Discounting Risk
What is discounting risk? Derivatives and other securities are often valued by discounting expected cashflows back to their present value using a discounting rate. The impact of a change of discounting rates on the valuation is referred to as Discounting Risk. Prior to the financial crisis, the rate used to discount cashflows in the derivatives market was LIBOR. Subsequently, many market participants adopted an approach that aligned the discounting rate used with the interest rate paid (cash margin rate) on the type(s) of collateral specified (known as Eligible Collateral) in the underlying Credit Support Annex (CSA). As such, any change to the discounting curve will not only change the Discounting Risk but also create a value transfer. Trillions of dollars’ worth of derivative contracts were either executed bilaterally between market participants under ISDAs (and if collateralized, with a CSA) or intermediated by Central Clearing Counterparties (CCPs). Many of these bilateral CSAs reference Effective Federal Funds Rate (EFFR) or EONIA as the benchmark used to determine the interest paid on cash collateral posted. The CCPs have switched to using SOFR (from EFFR) to determine the margin interest rate (known as Price Aligned Interest5 (PAI) rate) for USD activity and €STR (from EONIA) for PAI for EUR activity. What changes have the CCPs made? London Clearing House (LCH) and Chicago Mercantile Exchange (CME) have adopted SOFR in place of EFFR and €STR in place of EONIA as the PAI rate and discounting rate for all USD and EUR discounted contracts held in the exchange. In order to minimize the resulting discounting basis risk, it is expected that some market participants will seek to renegotiate their bilateral CSAs referencing EFFR to SOFR following these switches. What are the implications for CSAs? To reflect the eligible collateral, the current overnight benchmarks for the major currencies are used to pay PAI. For example, EFFR is used as the PAI rate on the posting of USD cash collateral for the majority of bilateral CSAs. This rate is generally used as the discount rate to value the trade. Similarly, when it comes to posting of EUR cash collateral, EONIA is the PAI rate and the discount rate. European Money Markets Institute (EMMI) has announced that EONIA will be withdrawn at end of the 2021. CSAs referencing this rate should be updated before that date, for example, by replacing with €STR. For CSAs where non-cash collateral is used, e.g. government bonds, margin interest is not transferred between counterparties, therefore there is no need for any renegotiation to change the discounting rate used to value the trade. The discounting rate used to value the underlying derivative contracts of these CSAs is aligned to the funding rate for this collateral in the secured funding market. As an example, if US Treasuries are the only eligible collateral, this could currently mean that the discount rate used is EFFR for the CSA. This rate could change to SOFR once the secured funding market adopts SOFR as the funding rate instead of EFFR. CSA changes are beginning to accelerate post the switch from EONIA to €STR and from EFFR to SOFR by the CCPs in July and October 2020 respectively. The switch in discounting rates is a significant milestone for the LIBOR transition as it is expected that market participants will look to switch their discounting risk to match CCPs, thereby establishing hedging and re-hedging requirements in transactions referencing these ARRs: a key driver for adoption of ARRs as the market standard floating rate.
Why will these changes drive an increased Bilateral Negotiation of CSAs? In addition to the negotiations mandated by the Margin Requirements for Non-Centrally Cleared Derivatives regulations6 (with the first phase effective 1st September 2016 and final phase due 1st September 2021), CSA renegotiations driven by LIBOR transition are expected to be a major exercise. Given the majority of OTC contracts referencing LIBOR are cleared, there is an expectation that market participants may want to ensure that both current regulatory mandated and non-mandated bilateral CSAs are in line with CCP discounting and PAI. The industry has largely been through the transition from using LIBOR to overnight rates for discounting. The expectation is that the transition from current overnight rates (EONIA, EFFR) to ARRs (€STR, SOFR) will not be as
5 https://www.theotcspace.com/content/price-alignment-interest-pai 6 https://www.bis.org/bcbs/publ/d475.htm
10 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx challenging as the transition from LIBOR to ARR for forecasting. Forecasting changes will be discussed in the next section. When will UBS be ready to open CSA negotiations? UBS has already commenced a number of CSA negotiations after the CCP transition dates to switch existing CSAs referencing EONIA to ESTR and EFFR to SOFR. Please contact your Sales representative if you wish to start this process and you have not been contacted yet. What is the impact on swaption contracts? The change in CCPs’ PAI for cleared swaps has had a corresponding impact on swaptions that reference the price of cleared swaps as the underlying instruments. UBS has evaluated the contractual terms of the relevant ISDA Supplements related to swaptions7 and is willing to discuss any changes to existing portfolios where required to incorporate latest market standards.
Summary and Practical Considerations Below are some of the practical considerations clients should take into account for this LIBOR transition
Summary Practical Considerations include • Discounting rate and interest paid on cash collateral • Review eligible collateral terms in your CSAs are usually aligned (specifically cash interest rate on margin) • Assess the economic impact of switching your interest rates • The switch in discounting rates by CCPs is likely to • Be mindful that basis risk may exist between your be a key driver for increased adoption of these new cleared and bilateral portfolios ARRs across the industry • Consider which CSAs you may need to prioritize renegotiation for in order to reduce this potential basis risk • Any changes to the margin annex for a derivative • A change to the cash margin rate in the agreement contract should reference the new ARR to replace will result in a change in margin interest flows and existing cash margin rate. potentially the discounting curve used for the underlying derivative portfolio • Consider there may be a value transfer with your bilateral counterpart for this change that will need to be agreed If you have any further questions, in the first instance please contact your sales representative. Alternatively, please get in touch via [email protected].
7 https://www.isda.org/a/W17TE/Swaptions_Settlement-and-Consequences-of-discounting-changes-memorandum.pdf
11 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 4. LIBOR Transition: Forecasting Risk
What is Forecasting Risk? LIBOR is widely applied as the floating interest rate benchmark referenced in a derivative (such as a swap floating leg), coupon on a bond or used to determine the interest rate on a loan. The valuation of such contracts or securities is driven by the change in the expected value of LIBOR—this is expressed as Forecasting Risk. Active LIBOR transition occurs when market participants switch out of LIBOR referenced contracts into ARR referenced contracts as market liquidity allows, rather than waiting until LIBOR ceases to exist. This activity would see ARR forecasting risk gradually replace LIBOR forecasting risk. The ARR forecasting curve is generally lower than the LIBOR equivalent.
What are the Fallback Provisions? For any contracts referencing LIBOR when it is discontinued, the parties will, in the absence of changes to the terms, have to rely on the contractual terms that exist to determine the post-cessation rate. The effectiveness and prevalence of these fallback provisions varies across products and markets. These provisions, depending on when drafted, may have the components listed in the following table. Market participants should review existing LIBOR- referencing financial contracts (that are expected to be held beyond the date by which LIBOR is no longer available) for provisions that determine the reference rate in the absence of LIBOR, or confirm the steps to be taken to frame an alternative. Various industry groups have provided fallback language for impacted financial products addressing permanent LIBOR cessation.
Term Definition Fallback Fallback language refers to the legal provisions in a contract that apply if the underlying Language reference rate (e.g. LIBOR) in the product is not published (whether on a temporary or permanent basis).
Fallback Rate The reference rate replacing LIBOR upon the Fallback Trigger Event. The updated ISDA Definitions specify ARRs as compounded in arrear settings as replacement rates for derivative contracts referencing LIBOR. However certain cash product contracts may contain no suitable language, resulting in the contracts falling back to the last LIBOR setting or the lenders' costs of funds. Spread As noted LIBOR is different to the ARR applicable in each jurisdiction and as part of ISDA fallback Adjustment methodology a fixed spread adjustment is applied to the ARR to account for differences in the construction of LIBOR and the ARR. Fallback Set of events relating to the original reference rate which may trigger the fallback to a new Trigger Event Reference Rate.
Clients should consider the economic and financial impact of the fallback provisions in their own contracts.
12 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx For example, the Federal Reserve Bank of New York's Alternative Reference Rate Committee has published language for cash products such as securitized products and loans. The Loan Market Association has also published fallback documentation for loans. ISDA published the updated ISDA Definitions on 23 October 2020 which become effective on 25 January 2021. The preference of the FCA8 is for market participants to pro-actively switch to new ARRs as soon as possible (as a primary approach), rather than to rely on fallback language (acting, in effect as a ‘seatbelt’). However, there are various aspects which may hinder this process; for example, liquidity in an ARR. What are some examples of differing fallback methods? There are different defined triggers and fallbacks for different products. In older bond documentation that did not foresee LIBOR cessation, for example, a common fallback is to use the last available published rate. Thus, in the event of LIBOR cessation, these securities would essentially become fixed rate products. In loans, a common ultimate fallback is to lenders' costs of funds. In a derivative, on the other hand, the alternative to LIBOR may be subject to calculation by agents (e.g. a dealer poll undertaken by a calculation agent). How will the LIBOR transition affect new contracts executed under the updated ISDA Definitions? The updated ISDA Definitions will become effective on 25 January 2021. All new derivative contracts executed after this date under the 2006 ISDA Definitions will contain the new fallback provisions. These updated Definitions include pre-defined ARR-based fallbacks for LIBOR and certain other IBORs and are triggered upon the occurrence of a pre-cessation or cessation announcement. How will the LIBOR transition affect the existing contracts? ISDA published the 2020 IBOR Fallbacks Supplement and Protocol on 23 October 20209. The new fallbacks will become effective for existing derivative contracts from 25 January 2021 where both counterparties have adhered to the Protocol or bilaterally implemented the Supplement prior to that date. Where one or both counterparties adhere to the Protocol after this date, the new fallback provision will become effective for contracts entered into before 25 January 2021 on the date the second counterparty adheres, or if the Supplement is implemented bilaterally from the date that is agreed. The ISDA Protocol has been drafted deliberately broad to cover transactions governed by ISDA Master Agreement or other forms of master agreement (e.g. Federation Bancaire Francaise, Swiss Master Agreement). If market participants choose not to sign up to the Protocol or do not adopt the provisions through a bilateral negotiation then the existing contracts will remain on the current fallback provisions as stipulated in the contract which when written probably did not envisage a permanent cessation of LIBOR. UBS encourages market participants to evaluate whether the Protocol is appropriate for their portfolios. ISDA's Benchmark Supplement10 also provides the option to implement a contractual process for existing contracts. However, both parties to the contract need to elect to implement the Supplement for existing contracts in order for this to take effect. It should be noted that even in ARRs where liquidity and volumes are most developed (e.g. SONIA), this is currently concentrated in linear derivatives such as swaps. For other types of products such as non-linear derivatives or cross currency derivatives there is currently little liquidity and volumes and market standards are still evolving. It should be noted that in these products, reliance on the ISDA Fallback Protocol to achieve transition may result in an outcome that is not aligned to the new market standards. Has UBS adhered to the 2020 IBOR Fallbacks Protocol? UBS has adhered to the ISDA 2020 IBOR Fallbacks Protocol across all of its main trading entities. What does this mean now that UBS has adhered to the IBOR 2020 Fallbacks Protocol? Where both bilateral parties in over-the-counter (OTC) derivatives adhere to the ISDA 2020 IBOR Fallbacks Protocol, relevant trades will have certainty of replacement rates upon a fallback trigger event.
9 https://www.isda.org/2020/10/23/isda-launches-ibor-fallbacks-supplement-and-protocol/ 10https://www.isda.org/book/isda-benchmarks-supplement/
13 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx IBOR fallbacks are triggered once LIBOR is deemed non-representative (also known as pre-cessation) or ceases to be published. Relevant trades are those traded before 25 January 2021 and are included within the list of documentation types within the ISDA 2020 IBOR Fallbacks Protocol. What is expected to happen to cleared contracts? CCPs have indicated they will look to apply the updated ISDA Definitions for all contracts (new contracts executed under updated Definitions as well as existing contracts)11. If CCP rulebooks are amended, will bilateral / manual amendments be required to ETD agreements with UBS? There is no requirement to repaper ETD Clearing Agreements as UBS mirrored relevant CCP rulebook provisions in its ETD agreements. There may be some commercial changes around the benchmarks used to calculate interest paid/received on margin balances but this resides outside of the ETD agreement and is part of the commission schedule. These changes would be discussed and agreed with clients ahead of implementation. How will the LIBOR transition affect products other than OTC derivatives? Although the ISDA Protocol covers some non-derivative agreement types, products such as loans and bonds sit outside of its scope. The industry is still working on approaches to improve the fallback language for such products. How could hedge effectiveness across asset classes via linked transactions be affected by the LIBOR transition? Differences in fallback methodology across different product types have added more complexity to the transition for linked transactions. For example, a swap hedging the LIBOR component of a bond or loan may continue to be an effective hedge upon the triggering of differing fallback methodologies. Market participants may need to review any linked or hedged transactions and evaluate contractual fallbacks in place. What is the ISDA LIBOR to ARR adjustment? ISDA has consulted with the industry to determine a market consensus on the methodology used to calculate the adjustment spread to address the term and credit differences between LIBOR and the ARR and other factors such as liquidity and fluctuations in supply and demand. These consultations12 have established that market participants prefer to use the compounded setting in arrears rate to address differences in tenor between IBORs and overnight ARRs, and the historical median spread over a five-year lookback period approach. Note that Bloomberg has begun to publish these LIBOR fallback rates as per ISDA's agreed methodology as of 21 July 2020. The real time data can be accessed via FBAK
11 https://www.isda.org/a/md6ME/FINAL-Pre-cessation-issues-Consultation.pdf 12 https://www.isda.org/a/WhXTE/Adoption-of-Risk-Free-Rates-Major-Developments-in-2020.pdf 13 https://www.bloomberg.com/professional/solution/libor-transition/ 14 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf
14 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx What is Pre-Cessation?
Cessation and Pre-Cessation Definitions Terms Definition Cessation Event Event whereby a reference rate is discontinued or unavailable permanently, triggering Fallback. A typical LIBOR cessation event would occur if there were no longer sufficient panel banks contributing to calculation of LIBOR Pre-Cessation Event An event which impacts the reference rate but does not prevent its publication. With respect to LIBOR, such an event could be where the FCA deems LIBOR unrepresentative per Benchmarks Regulation and prohibit its use in contracts.
ARRC15 recommended the industry to include Pre-Cessation as a Fallback Trigger event in the Fallback Provisions for any new cash products referencing LIBOR. The updated ISDA Definitions include both pre-cessation fallbacks (based on a 'non-representativeness' determination) and permanent cessation fallbacks. This will apply to all new derivatives referencing LIBOR that incorporate the amended 2006 ISDA Definitions traded after the effective date 25 January 2021. For Legacy trades (i.e. those transacted prior to the effective date of the updated Definitions which is 25 January 2021) market participants are expected to evaluate whether the updated Definitions which are appropriate and incorporate via adherence to the ISDA 2020 Fallbacks Protocol. What is 'Synthetic LIBOR'? On 23 June 2020 HM Treasury16 announced that it intends to bring forward legislation to amend the Benchmarks Regulation (BMR) to give the FCA new and enhanced powers. These could help manage and direct an orderly wind-down of critical benchmarks such as LIBOR. The proposed changes will create a possible way of reducing disruption by enabling continued publication of a LIBOR rate using different and more robust methodology and inputs. The legislation would allow the FCA to direct a change to the methodology, if doing so would better protect consumers and the integrity of the market than cessation of the rate. By acting via the administrator, certain LIBOR currency and tenor settings (including the screen rates) are expected to be preserved and remain in place under the new methodology for an extended period. We will refer to this continued publication of LIBOR under a different methodology as 'Synthetic LIBOR’. The FCA’s Statement on 18 November 2020 provided a clearer indication of which LIBORs may be able to be continue publication in the form of Synthetic LIBOR, albeit for specific use cases. CHF and EUR LIBOR are unlikely to meet requirements under the new methodology, while GBP LIBOR is likely to continue; JPY and USD LIBOR are yet to be determined. The FCA has also indicated that they envisage calculating GBP Synthetic LIBOR based on a forward looking SONIA Term Rate plus a fixed adjustment spread under the same ISDA methodology. What are the implications of 'Synthetic LIBOR' on Transition? Regulators still expect the same focus and urgency from market participants to transition from LIBOR by primarily actively switching from LIBOR contracts into ARR contracts or failing that, to insert robust and workable fallback. These new and enhanced powers may allow the continued publication of LIBOR (including the screen rates) with a more robust methodology and inputs. It is expected to be based on forward looking term ARRs plus a fixed adjustment spread per ISDA methodology. Synthetic LIBOR is also expected to be restricted by the FCA17 for use by UK supervised entities to some or all tough legacy contracts. Tough Legacy contracts are contracts that have no or inappropriate/unviable alternatives and no realistic ability to be renegotiated or amended. A policy of statement is expected from the FCA to define which tough legacy contracts could use Synthetic LIBOR following its consultation in Q2 2021.
15 https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf 16 https://www.fca.org.uk/markets/transition-libor/benchmarks-regulation-proposed-new-powers 17 https://www.fca.org.uk/news/statements/fca-statement-planned-amendments-benchmarks-regulation
15 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx What are the latest expected publication dates for LIBOR? Subject to the outcomes of its consultations, ICE Benchmark Administration (IBA) announced in November 2020 that they will cease publication of GBP, CHF, EUR and JPY LIBOR (all tenors) and USD LIBOR (1-Week and 2-Month) at the end of 2021. However, other USD LIBOR tenors will continue to be published by IBA until end-June 2023. The implications of this is that some bifurcation of cessation timelines and transition approaches across LIBOR currencies is now expected, including: • USD LIBOR: the expected final publication of USD LIBOR Tenors (except 1W and 2M) will be 30 June 2023. Firms are expected to cease entering into new contracts using USD LIBOR as soon as practical or at the latest by 31 December 2021. Existing contracts that have not been transitioned upon cessation may be impacted by potential legislation underway in the US. To-date, the FCA has not indicated any plan for Synthetic USD LIBOR. • GBP LIBOR: a pre-cessation announcement is likely in 2021 with the effective date on or shortly after 31 December 2021. A Statement from the FCA indicated that GBP LIBOR is likely to continue publication under an amended methodology of a SONIA term rate + fixed spread (defined as Synthetic GBP LIBOR) with expected restrictions upon its usage. • CHF, EUR LIBOR: the expected final publication is 31 December 2021. Continued publication is unlikely. • JPY LIBOR: the expected final publication is 31 December 2021. Continued publication under an amended methodology is yet to be decided. IBA will close the consultation for feedback by 25 January 2021. To-date, there has been no decision on whether other currencies linked to USD LIBOR (e.g. SOR) would update their timelines to align with USD LIBOR. A joint statement was issued by the Federal Reserve, Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) on 30 November, stating that firms should not enter into new transactions referencing USD LIBOR after 31 December 2021. Additionally, in light of potential safety and soundness concerns around new USD LIBOR contracts, they would examine firms' current practices. Why is the Transition challenging for certain products? Certain contracts which reference LIBOR (including bonds, structured products, securitized products, loans and a subset of existing contracts) may have characteristics that impede smooth transition such as product mechanics for material amendments, non-linearity, illiquidity or because they act as hedges to products with different fallback methods. Non-Protocol Covered agreements and confirmations may need to be reviewed to determine an approach. Generally, this approach is likely to involve market participants being requested to sign documentation agreeing to incorporate robust fallback language to allow the transition to the relevant replacement rate. Why might these Forecasting Risk changes drive increased bilateral/ multilateral negotiation? Due to the increased complexity introduced by the differences between asset class fallbacks and product amendment mechanics, the industry is expected to need to perform a significant review of contractual documentation before agreeing to change terms on their existing trades. Amendments to existing trades will be a challenging exercise if market participants have to amend a significant volume of trades across different products on a bilateral or multilateral basis. What are the main drivers that may determine the impact on Forecasting Risk? The level of impact on value and Forecasting Risk will be driven by but not limited to the following: • The specific legacy reference rate • Whether term rates become available • The specific fallback trigger provisions in existing contract(s) • Fallback rate to include an adjustment required to reflect the credit and term differences agreed by industry groups • The maturity of the contract(s) • The date when changes are expected to happen • The type of product as there are potentially differing industry solutions There is no industry consensus on how the change in the value of contracts between parties will be handled.
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Summary and Practical Considerations Clients should study existing contracts that reference LIBOR and consider future trading and risk management requirements and seek professional advice (if applicable) on the economic, legal, and operational implications. Clients may also consider their specific capital, accounting, and tax consequences of LIBOR transition. Below are some of the practical considerations clients should take into consideration for this LIBOR transition.
Summary Practical Considerations include
• Increased complexity may be introduced by the • You should perform a review of contractual differences between asset class fallbacks documentation before agreeing to change terms on existing trades keeping in mind that current fallback provisions may create, upon cessation, a fallback to a rate inconsistent with the economics of the original deal • Acknowledge that in any new fallback provisions that specify an ARR to replace LIBOR, there may be an adjustment (to address the term and credit differences) • Updated ISDA Definitions and ISDA 2020 IBOR • New OTC derivative contracts executed under ISDA Fallbacks Protocol published 23 October 2020 Definitions will incorporate robust fallbacks effective from 25 January 2021. For legacy OTC derivative
trades, you should consider and determine whether to adhere to the ISDA 2020 IBOR Fallbacks Protocol to incorporate robust fallbacks • Differences in fallback methodology across different • Identify all transactions which you believe to be product types may impact hedge effectiveness across linked and evaluate contractual fallbacks in place in transactions which you believe to be linked order to determine an approach to mitigate potential differences in fallback methodology across these transactions • Evaluation of current contractual fallback provisions • You may be requested to sign documentation may lead to increased bilateral discussion agreeing to the transition to the relevant replacement rate or adopt the ISDA Benchmark Supplement. However the latter is an alternative path that does not provide certainty of economic outcome • Stay up to date with the industry announcements • Categorize your in-scope population of trades in related to cessation or pre-cessation announcement relation to possible transition activities. Note any dates as these will fix fallback rates spreads. Also be dependencies you require such as market readiness aware of how Synthetic LIBOR methodology or internal system/operational development. develops as some 'Tough Legacy' contracts may end up referencing this rate If you have any further questions, in the first instance please contact your sales representative. Alternatively, please get in touch via [email protected].
17 18 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 5. Regulatory and Market Milestones
18 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 6. Regulatory and Market Milestones Continued
SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 7. Appendix
ARRC Recommended Best Practices
IT/Operational Target for No New Anticipated Fallback Vendor Hardwired Fallbacks USD LIBOR (maturing Rates to be selected Product Incorporated by Readiness beyond 2021) by
Floating Rate 30th June 2020 30th June 2020 31st Dec 2020 6 months before the first reset/fixing Notes scheduled after LIBOR cessation
Business Loans 30 th Sept 2020 30 th Sept 2020 for 30 th June 2021 6 months before the Syndicated Loans first reset/fixing scheduled after 31st October 2020 for Bilateral Loans LIBOR cessation
Consumer Loans Mortgages: Mortg ages: Mo rtgages: Specific consumer regulations 30th June 2020 30th Sept 2020 30th Sept 2020 Student Loans: 30th Sept 2020
Securitizations 30 th June 2020 31 st Dec 2020 CLOs: 30th Sept 2021 6 months before the first reset/fixing Other: 30th June 2021 scheduled after LIBOR cessation
Derivatives 25 January 2021 Dealers to act to deliver 30 th June 2021 a liquid SOFR derivatives markets to clients Note: These dates may be updated following the IBA consultation announcement on its intention to cease publication of most USD LIBOR tenors by Jun 2023
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FINMA’s Recommendations and Transition Roadmap for 2021 FINMA recently issued guidance17 to clarify FINMA’s recommendations to affected supervised institutions and market participants, to ensure that they use the time until the end of 2021 to prepare for a discontinuation of LIBOR in CHF, EUR, GBP and JPY (in all tenors), and in USD (in the 1W and 2M tenors) across all product types. Date Milestones
By 25 Signing of ISDA 2020 IBOR Fallbacks Protocol January 2021 No new “tough legacy”: Across Readiness to grant loans based B y 31 all product types, there should be on ARR: If they are lenders, the January 2021 no new transactions based on CHF affected supervised institutions or EUR LIBOR that mature after should be in a position to grant end-2021 and do not contain loans that are not based on CHF, robust fallback clauses. Where EUR, GBP, JPY or USD LIBOR. This possible, the same objective can be achieved by giving should also be aimed at for new borrowers the possibility to choose transactions based on GBP, JPY or another rate (fixed interest and/or USD LIBOR. an ARR such as SARON).
Plans for the reduction of “tough legacy”: Based on a full evaluation of their inventory of By 31 March existing CHF and EUR LIBOR contracts, the affected supervised institutions should have determined 2021 which contracts and what volume are potentially “tough legacy” as they mature after 2021 and do not contain robust fallback clauses. Institutions should have formulated detailed project plans with steps to be taken and progress monitoring in order to reduce this volume of “tough legacy” contracts to a minimum by end-2021. System and process changes Mitigation of risks for By 30 June New contracts in implemented: The affected remaining “tough legacy”: By 2021 general based on ARR: supervised institutions should have implementing the plans set out In general, the affected implemented the system and above for the reduction of “tough supervised institutions process changes necessary to legacy”, and by considering the should only use ARR in enable transition to ARR and the progress of negotiations already new CHF, EUR, GBP, JPY application of fallback rates. conducted with the counterparties and USD contracts. or other solutions that are already
in place, it should be clear whether the objective of reducing the volume of tough legacy contracts in CHF and EUR LIBOR and the discontinued GBP and JPY LIBOR tenors, as well as the 1W and 2M tenors of USD LIBOR, to a minimum is achievable.
17 https://www.finma.ch/en/news/2020/12/20201204-am-libor/
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Date Milestones Full operational readiness: All All new contracts based on By 31 relevant systems and processes ARR: All new transactions with December should already be able to function variable interest in CHF, EUR, GBP, 2021 without reliance on LIBOR JPY and USD should be based on ARR.
31 December Intended discontinuation of LIBOR 2021 Please note that individual tenors of USD LIBOR may continue to be available until the end of June 2023
22 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx BoE RFR Working Group - Revised target milestones to manage transition away from Sterling LIBOR linked products by end 2021
By End Of: Q4 2020 Q1 2021 Q2/Q3 2021 • Adhere to the ISDA • Cease initiation of new • Assess and actively Derivatives protocol before the Sterling LIBOR linked linear convert where viable (e.g. effective date* derivatives expiring after auction / compression 2021 (except for risk mechanisms) • Be operationally ready to management of existing support the development positions)** • Cease trading of LIBOR and market making of non- linked non-linear
linear and cross-currency derivatives, and cross- SONIA derivatives currency derivatives with a sterling leg, expiring after • Sterling swaps liquidity 2021 (except for risk providers to adopt new management of existing interdealer quoting positions) conventions based on
SONIA and move to use of single period swaps rather than forward rate agreements on 27 October, subject to prevailing market conditions.
• Progress active conversion • Cease new issuance of • Complete active Bonds and (e.g. consent solicitation Sterling LIBOR-referencing conversion where viable Securitisations mechanisms) where viable products maturing after
to reduce legacy volume 2021
• Complete assessment of allpost-2021 contracts to identify those that can be actively converted
• Accelerate active conversion where viable (e.g. consent solicitation mechanisms) to reduce legacy volume
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By End Of: Q4 2020 Q1 2021 Q2/Q3 2021 • Progress active conversion • Cease new issuance of • Complete active Loans (e.g. at renewal, proactive Sterling LIBOR-referencing conversion where viable negotiation, or using pre- products maturing after agreed terms) where viable 2021 • Where active conversion is to reduce legacy volume not possible, ensure • Complete assessment of robust fallbacks are
allpost-2021 contracts to adopted identify those that can be
actively converted
• Accelerate active conversion (e.g. at renewal, proactive negotiation, or using pre- agreed terms) where viable to reduce legacy volume
Note: *Subject to individual firms’ usual governance procedures and negotiations with counterparties as necessary. Where the protocol is not used, other appropriate arrangements will need to be considered to mitigate risks. ** The RFRWG recognises that dealers and other market makers executing such trades for their clients may accumulate LIBOR risk as a result and that they cannot necessarily assess, or reasonably be expected to seek to discover, the intent of their clients when approached to initiate a LIBOR derivative trade. Discussions are ongoing on a conventions switch from LIBOR to SONIA in the derivative markets, and this includes non- linear derivatives, cross currency swaps and futures. It is acknowledged that non-linear and cross-currency RFR markets currently remain nascent, and that there will be further developments on the approach for transition of legacy non-linear derivatives during 2020.
24 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx Other IBORs Benchmark Rates The other IBOR benchmark rates are detailed in the below table.
Jurisdiction Reference Rate Administrator Commentary Euro Area EURIBOR EMMI The most widely used benchmark of the other IBORs; the European Commission has expressed confidence in EURIBOR for the medium term. A new hybrid methodology is in the process of being implemented. The ECB RFR WG proposed roadmap18 (published in late 2019) suggests that 2020 work focus are on:
i) EONIA transition to ESTR, particularly on building liquidity for ESTR and the CCP discounting switch that occurred on Monday 27 July, and ii) Development of ESTR-based fallbacks for EURIBOR, however the final recommendation has been deferred to Q1 2021 due to COVID 19 impact per the May ECB RFR WG minute.
A list of key milestones and publications can be found from the ECB RFR WG website19 On 23 November 2020, the ECB Working Group on Euro Risk- Free Rates published two public consultations on fallback rates to EURIBOR, calling for views on: 1. Fallback rates based on €STR and spread adjustment methodologies in order to produce the most suitable EURIBOR fallback measures per asset class 2. Potential events that could trigger such fallback measures.20 Japan TIBOR JBA In August 2020 the BoJ Cross-Industry Committee on Japanese Yen published its latest consultation21 on JPY interest rate benchmarks, recommending fallback replacement rates and spread adjustments for legacy cash products referencing JPY LIBOR. The consultation paper included a draft transition roadmap, setting out key transition targets: • start negotiating amongst contracting parties from 3Q 2020 • developing loans and bonds systems and operations on compounded ARRs in arrears by end 1Q 2021 • publication of daily prototype rate from 4Q2020 and forward looking term rate by mid-2021 • ceasing new LIBOR loans and bonds by end 2Q 2021, and significant reduction of LIBOR stock by end 3Q 2021.
18 https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk- free_rates/shared/pdf/20191204/2019_12_04_WG_on_euro_RFR_meeting_Item_2_Planning_for_the_WG_H1_2020.pdf 19 https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk-free_rates/html/milestones.en.html 20 https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201123~1d59dcbe27.en.html 21 https://www.boj.or.jp/en/paym/market/jpy_cmte/index.htm/
25 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx Jurisdiction Reference Rate Administrator Commentary Australia BBSW ASX BBSW will likely remain as a benchmark following extensive and ongoing work by its administrator, ASX, to strengthen its methodology. The interbank overnight Cash Rate (also referred to as AONIA) is the alternative rate and may be more appropriate in the future as closely aligned to the features of other ARRs.
ISDA have included AONIA as the fallback rate for BBSW within the recently published ISDA 2020 IBOR Fallbacks Protocol.
The RBA will make it a prerequisite that fallback provisions be introduced for new securities referencing BBSW before the securities can be eligible for RBA's market operations. FRNs provided by banks, securitization trusts and governments will be affected by this. After consultation with the industry, the timing and specifics of the introduction of this requirement will be determined.
China SHIBOR NIFC Shanghai No significant notices on cessation or change to the benchmark noted. Hong Kong HIBOR TMA Hong Kong has adopted a multiple-rate approach, whereby HIBOR and HONIA will co-exist and market participants are free to choose between them.
A circular on interest rate benchmark reform was released by HKMA in July 2020, setting out key milestones for Authorised Institutions: • Products should be available from 1 January 2021 referencing the ARRs to LIBOR • All newly issued LIBOR-linked contacts maturing after 2021 from 1 January 2021 should contain adequate fallback provisions • Issuance of new LIBOR-linked products maturing after 2021 should cease by 30 June 202122 Singapore SIBOR ABS Transition from SIBOR to SORA is recommended as part of a SORA centered approach.
On 29 July 2020, the ABS, SFEMC and the SC-STS published a joint industry report with the recommendation of discontinuation of SIBOR, and shifting to the use of SORA as the primary interest rate benchmark for SGD markets.23
22 https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200710e1.pdf 23 https://www.abs.org.sg/docs/library/joint-industry-consultation-on-the-sibor-reform-and-a-shift-to-a-sora-centered-sgd-interest-rate- market.pdf
26 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx Jurisdiction Reference Rate Administrator Commentary Singapore SOR ABS Given the reliance on USD LIBOR for the computation of SOR, and its likely discontinuation after LIBOR ceases to exist, the SC-STS has published guidance on the transition from SOR to SORA: • End-April 2021, issuance of SOR-linked loans and securities maturing after end-2021 should cease • End-February 2021, non-DSIB should have readily available SORA-based products for their customers • End-September 2021, gross exposure to SOR derivatives should be reduced to 90% by end-202024 Sweden STIBOR SFBF STIBOR is designated as a Critical Benchmark under the Benchmarks Regulation (BMR). Work is ongoing to have STIBOR approved under the BMR. In April 2020 the Swedish Bankers’ Association has transferred the administration of STIBOR to Swedish Financial Benchmark Facility (SFBF).25 New Zealand BKBM NZFMA The NZFMA has selected the OCR to act as the ARR for BKBM. The new ARR will be calculated independently to the BKBM fallback benchmark rate, with the NZFMA currently developing a term structure methodology. BKBM will likely continue as a benchmark in NZD.26 Canada CDOR RBSL Canada currently operates with both CDOR and CORRA co- existing. It is expected however, that over time CORRA will become the predominant Canadian interest-rate benchmark, especially for derivatives and floating-rate notes.
The CDOR administrator, Refinitiv, announced in November 2020 that, with a six-month notice period, it would discontinue the 6- and 12-month CDOR tenors27 Norway NIBOR NoRe NIBOR has gone through methodology enhancements, with a consultation issued in October 2019.28 The ARR Working Group has confirmed focus on: • How to establish an OIS market referencing NOWA in NOK • Using NOWA as a fallback to NIBOR. A timeline for the transition from NOWA to NIBOR has yet to be published. India MIBOR / MIFOR NSEIL The RBI is currently developing plans to determine an ARR to replace both MIFOR and MIBOR as a result of the expected discontinuation of LIBOR.29
Note: This information has been sourced from administrator websites and is accurate as of 25th November 2020.
24 https://www.abs.org.sg/docs/library/sc-sts-announces-timelines-to-cease-issuance-of-sor-linked-loan-products-and-publishes-market-guidance- to-support-transition-to-sora.pdf 25 https://www.swedishbankers.se/en-us/the-swedish-bankers-association-in-english/stibor/press-release-the-swedish-financial-benchmark- facility-takes-over-the-calculation-and-administration-of-stibor/ 26 https://www.rbnz.govt.nz/news/2020/01/interest-rate-benchmark-reform 27 https://www.refinitiv.com/content/dam/marketing/en_us/documents/policies/cdor-change-consultation.pdf 28 https://static.norges-bank.no/en/news-events/news-publications/Submissions/2019/2019-10-02/ 29 https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=19898
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Overnight Index Swap Industry Definitions Terms Definition Compounding Daily compounding of the ARR (current standard in the Overnight Index Swap market) Averaging Daily averaging of the ARR
Lockout The rate is taken from a set day for the remainder of the period E.g. a 4 day lockout period takes the rate on payment day minus 4 and uses this same rate for the remainder of the term Backward Shift / TheThe raterate isusedused taken toto calculatefromcalculate a set aa dayraterate for forfor the eacheach remain dayday ininder anan of ininterest theterest period periodperiod isis basedbased onon thethe raterate thatthat Lookback e.g.representsrepresents a 4 day transactionstransactions lockout period fromfrom takes aa priorprior the day dayrate on payment day minus 4 and uses this same rate fore.g.E.g. the withwith remainder aa 22 dayday shift backwardof the / lookback term shift /the lookback observation the observation period starts period and endsstarts 2 and days ends prior 2 todays interestprior to periodinterest start period and start end anddates end dates
ARR detailed information Jurisdiction Target ARR Publication Transaction Data Sources Available as of US Secured Overnight Around 8am EST Tri-Party, General Collateral 3 April 2018 Financing Rate next business day Financing, Bilateral Treasury (SOFR) repos UK Sterling Overnight At 9am GMT next Unsecured overnight bilateral 23 April 2018 Index Average business day transactions (reformed) (SONIA) Euro Area Euro Short Term At 9am CET next Volume weighted average based 2 October 2019 Rate (€STR) business day exclusively on the eligible data from the unsecured market segment of the Money Market Statistical Reporting to the ECB Switzerland Swiss Average At 6pm CET same Interbank repo 25 August 2009 Rate Overnight business day (SARON) Japan Tokyo Overnight At 10am JST next Money Market brokers 1 November 1997 Average Rate business day (TONA)
28 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 8. Bibliography
1 ICE Benchmark Administration Methodology, available athttps://www.theice.com/iba/libor#methodology 2 Impact of the coronavirus on firms’ LIBOR transition plans available at https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans 3 IOSCO Benchmark Principles, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD415.pdf 4 Andrew Bailey, The future of LIBOR (July 7, 2017), available at https://www.fca.org.uk/news/speeches/the- future-of-libor 5 Definition of Price Aligned Interest available at https://www.theotcspace.com/content/price-alignment- interest-pai 6 Margin requirements for non-centrally cleared derivatives regulations available at https://www.bis.org/bcbs/publ/d475.htm 7 ISDA Settlement of certain swaptions and the issues which arise from the proposed adjustment to
discounting by certain clearinghouses, available at https://www.isda.org/a/W17TE/Swaptions_Settlement- and-Consequences-of-discounting-changes-memorandum.pdf 8 Andrew Bailey, LIBOR Transition Briefing (July 15. 2019), available at 9 https://www.fca.org.uk/news/speeches/libor-preparing-end ISDA Launches IBOR Fallback Supplement and Protocol, available at ttps://www.isda.org/2020/10/23/isda- launches-ibor-fallbacks-supplement-and-protocol/ 10 ISDA Benchmark Supplement, available at https://www.isda.org/book/isda-benchmarks-supplement/ 11 "CME and LCH have each also communicated to ISDA and regulators that they may elect to consider pre- cessation triggers for fallbacks if LIBOR was found to be non-representative, even if the 2006 ISDA Definitions do not include them", available at https://www.isda.org/a/md6ME/FINAL-Pre-cessation-issues- Consultation.pdf
12 ISDA adoption of risk free rates major developments available at https://www.isda.org/a/WhXTE/Adoption- 13 of-Risk-Free-Rates-Major-Developments-in-2020.pdf Bloomberg, Preparing for LIBOR Transition, available at https://www.bloomberg.com/professional/solution/libor-transition/ 14 ARRC Recommended Best Practices for Completing the Transition from LIBOR available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf 15 ARRC recommendations on Pre-Cessation in Fallback provisions for FRNs, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/FRN_Fallback_Language.pdf 16 Benchmarks Regulation – proposed new powers – available at https://www.fca.org.uk/markets/transition- libor/benchmarks-regulation-proposed-new-powers 17 FINMA’s Recommendations and Transition Roadmap for 2021 is available at https://www.finma.ch/en/news/2020/12/20201204-am-libor/ 18 FCA statement on planned amendments to the Benchmarks Regulation available at https://www.fca.org.uk/news/statements/fca-statement-planned-amendments-benchmarks-regulation 19 Final deliverables on the EURO RFR Working Group available at https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk- free_rates/shared/pdf/20191204/2019_12_04_WG_on_euro_RFR_meeting_Item_2_Planning_for_the_WG _H1_2020.pdf 20 European Central Bank key milestones available at https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk- free_rates/html/milestones.en.html 21 European Central Bank "Working group on euro risk-free rates launches two public consultations on fallbacks to EURIBOR" available at https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr201123~1d59dcbe27.en.html 22 Bank of Japan consultation on the Appropriate Choice and Usage of Japanese Yen Interest Rate Benchmarks available at https://www.boj.or.jp/en/paym/market/jpy_cmte/index.htm/ 23 Hong Kong Monetary Authority Reform of Interest Rate Benchmarks available at
29 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2020/20200710e1.pdf 24 Joint industry consultation on the SIBOR reform and a shift to SORA-Centered SGD available at https://www.abs.org.sg/docs/library/joint-industry-consultation-on-the-sibor-reform-and-a-shift-to-a-sora- centered-sgd-interest-rate-market.pdf 25 "Industry Steering Committee announces timelines to cease issuance of SOR-linked financial products available at https://www.abs.org.sg/docs/library/sc-sts-announces-timelines-to-cease-issuance-of-sor- linked-loan-products-and-publishes-market-guidance-to-support-transition-to-sora.pdf 26 The Swedish Financial Benchmark Facility takes over the calculation and administration of Stibor available at https://www.swedishbankers.se/en-us/the-swedish-bankers-association-in-english/stibor/press-release- the-swedish-financial-benchmark-facility-takes-over-the-calculation-and-administration-of-stibor/ 27 Reserve Bank of New Zealand Interest Rate Benchmark Reform available at https://www.rbnz.govt.nz/news/2020/01/interest-rate-benchmark-reform 28 Refinitiv announcement of proposed CDOR changes available at https://www.refinitiv.com/content/dam/marketing/en_us/documents/policies/cdor-change-consultation.pdf 29 Norges Bank consultation response – changes to NIBOR available at https://static.norges-bank.no/en/news- events/news-publications/Submissions/2019/2019-10-02/ 30 Reserve Bank of India "LIBOR – The Rise and the Fall available at https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=19898
30 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 9. Glossary
Term Definition
€STR Euro Short Term Rate ARR Alternative Reference Rate ARRC Alternative Reference Rate Committee CCP Central Clearing Counterparty CFTC Commodities, Futures Trading Commission CME Chicago Mercantile Exchange CSA Credit Support Annex EFFR Effective Fed Funds Rate EMMI European Money Markets Institute FBF Federation Bancaire Francaise FCA Financial Conduct Authority FRBNY Federal Reserve Bank of New York IBA ICE Benchmark Administration ICE InterContinental Exchange IOSCO International Organization of Securities Commissions ISDA International Swaps and Derivatives Association LCH London Clearing House LIBOR London Interbank Offered Rate OTC Over-the-Counter PAI Price Aligned Interest SARON Swiss Average Rate Overnight SMA Swiss Master Agreement SOFR Secured Overnight Funding Rate SONIA Sterling Overnight Index Average TONA Tokyo Overnight Average Rate
31 SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 10. Disclaimer
These materials are for distribution only under such circumstances as may be permitted by applicable law. They have not been prepared with regard to the specific investment objectives, financial situation or particular needs of any specific recipient. They are published solely for informational purposes and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments or to participate in any particular trading strategy. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. The recipient should not construe the contents of these materials as legal, tax, accounting, regulatory, or other specialist or technical advice or services or investment advice or a personal recommendation. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein except with respect to information concerning UBS, nor is it intended to be a complete statement or summary of the securities markets or developments referred to in these materials or a guarantee that the services described herein comply with all applicable laws, rules and regulations. They should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. UBS is under no obligation to update or keep current the information contained herein, and past performance is not necessarily indicative of future results. UBS, its directors, officers, employees or clients may have or have had interest or long or short positions in the securities or other financial instruments referred to herein and may at any time make purchases and/or sales in them as principal or agent. UBS may act or have acted as market-maker in the securities or other financial instruments discussed in these materials. Furthermore, UBS may have or have had a relationship with or may provide or have provided investment banking, capital markets and/or other financial services to the relevant companies. Neither UBS nor any of its directors, officers, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of these materials or reliance upon the information contained herein. Additional information may be made available upon request. Clients wishing to effect transactions should contact their local sales representative. Country-specific information For further important country-specific information, please see the following link: https://www.ubs.com/global/en/investment-bank/us-sales-trading-country-specific.html
SH-Presentations Client Guide (UBS Format) UNAPPROVED v6.0.10.docx 11. Contact information
If you have any further questions, please contact your sales representative. Alternatively, please get in touch via [email protected].
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