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LIBOR Transition JUNE 2021 LIBOR Transition AT A GLANCE WHAT IS LIBOR? Following guidance from the Financial Stability Board (FSB), regulatory led public/private working groups Interbank Offered Rates (IBORs), commonly referred were established to identify and promote adoption to as the London Interbank Offered Rate (LIBOR), are of robust alternate risk free rates (ARFRs) that were systemically important interest rate benchmarks, aimed based on substantial underlying transactions to at providing an indication of the average rates at which replace the various LIBOR currency rates. Most RFRs banks can obtain unsecured funding from each other were created as a response to the end of LIBOR; while in various currencies. Various regulatory authorities SONIA, which was historically referenced on overnight have announced their support for a reduced reliance on transactions, was reformed. IBORs, with cessation dates starting at the end of 2021, detailed in Figure 1. LIBOR has often been used in the industry as an interest rate benchmark rate for various LIBOR VERSUS RFR financial products ranging from capital markets to lending products including mortgages. LIBOR RFR In addition to LIBOR cessation, other benchmarks Term Term rate An overnight rate such as EONIA (Euro Overnight Index Average) will be benchmark e.g. (with no existing ceasing publication on 3 January 2022 and there are 3M, 6M, 1Y term structure)1 a number of other benchmarks that reference LIBOR in their calculations, which will be reformed, including View Forward-looking Backward-looking SOR (Singapore Dollar Offer Rate) and THBFIX (Thai Baht Fix). Secured? Unsecured Some based on a secured overnight rate, others WHAT ARE RISK FREE RATES (RFRS)? unsecured RFRs are interest rate benchmarks that seek to Credit Risk Embedded credit Near to risk free, measure the overnight cost of borrowing cash by risk component as there is no bank banks, underpinned by actual transactions. Examples due to bank risk credit risk or term of three common RFRs include: liquidity premium • SOFR (Secured Overnight Financing Rate) measures embedded the cost of borrowing cash overnight collateralized by United States Treasury securities. Derivation Based on a poll Exclusively • SONIA (Sterling Overnight Index Average), and of 20 banks from actual €STR (European Short Term Euro Rate), which transactions measure the cost of interbank unsecured cash borrowing by banks, respectively in GBP and Euros, with bank and non-bank financial counterparts. 1 Industry is working with providers to create published term RFRs based on market expectations over a period of time. WHY TRANSITION FROM LIBOR TO RFRS? LIBOR is predominantly based on submissions by certain banks, including Citi to the ICE Benchmark Administration (IBA); a unit of Intercontinental Exchange (ICE). However, various regulatory authorities have announced their support for a reduced reliance on LIBOR, and more generally on IBORs of other currencies. On 5 March 2021, the ICE Benchmark Administration (IBA) announced expected LIBOR cessation dates (see table below). Figure 1: Common RFRs and respective LIBOR cessation dates ARFR Rate Name Administrator Description Cessation Date UNSECURED SONIA Sterling Bank of Rate covers overnight wholesale December 31, 2021 Overnight Index England deposit transactions. Average SECURED SOFR Secured FED Bank of Rate covers multiple overnight repo USD 1-week, 2-month: Overnight New York market segments. December 31, 2021 Financing Rate All other USD settings (i.e., overnight/spot next, 1-, 3-, 6-, 12-month): June 30, 2023 SECURED SARON Swiss Average SIX Exchange Rate reflects interest paid on interbank December 31, 2021 Rate Overnight overnight repo average. UNSECURED TONAR Tokyo Overnight Bank of Japan Rate captures overnight call rate market. December 31, 2021 Average Rate UNSECURED €STR European Short European Rate captures overnight wholesale December 31, 2021 Term Euro Rate Central Bank deposit transactions. WHY IS CAREFULLY MANAGING THE LIBOR no longer linked to IBORs. Given LIBOR’s extensive TRANSITION IMPORTANT AND HOW IS CITI use across financial markets, the transition away PRIVATE BANK PREPARING? from LIBOR presents various risks and challenges to financial markets and institutions, including Citi. These include, but are in no way limited to: LIBOR is entrenched in market activity and underpins more than $223tn of USD LIBOR contracts across a variety of products (predominantly derivatives). It 1. Contractual robustness: Current fallback language is estimated that US$74tn2 will remain outstanding in contractual documentation, if any, was only intended beyond June 2023. to deal with a temporary unavailability of LIBOR and not a permanent discontinuation. Accordingly, Citi Private Bank has updated its loan documentation Replacing such a critical tool of the financial system to incorporate robust fallback language in line with is of course a detailed and challenging task, and we industry guidance, where a LIBOR rate is offered. recognise that considerable work is needed to prepare for an environment in which financial instruments are 2 Alternative Reference Rates Committee Progress Report: The Transition from US Dollar LIBOR March 2021. 2/3 International Swaps and Derivatives Association WHAT’S NEXT? (ISDA) published the Amendments to the 2006 ISDA Definitions (the “IBOR Fallbacks Supplement”) with Existing LIBOR Products: To the extent you hold robust fallbacks for derivative trades, which went into an impacted product with Citi Private Bank, we will effect on January 25, 2021. For derivatives linked to contact you with additional information specific to LIBOR entered into with us after that date, the IBOR your product prior to the cessation of LIBOR to ensure Fallbacks Supplement is automatically incorporated a smooth transition and to minimize impact to you. into its terms. The fallback language contained in the IBOR Fallbacks Supplement prescribes the basis on Existing Citi Private Bank Hedged Loans: To the which, when LIBOR is discontinued, it will be replaced extent you have a Citi Private Bank loan hedged by by an RFR including an adjustment spread. a swap that you have traded with Citi Private Bank, the industry standard replacement rate methodology for loans differs from the ISDA fallback standard 2. Availability of a Term or Compounded in Arrears methodology for the swap. We will therefore contact RFR: End users of cash products, particularly loans, you prior to LIBOR cessation to discuss your loan and have a preference for forward-looking term rates given swap positions and offer you the ability to actively their main concern of having certainty over future convert your swap methodology with a solution that cash flows, whereas RFRs are backward-looking. Unlike could be an alternative to the industry standards.3 LIBOR, there are two generic rate types (Terms and Compounded in Arrears) which Citi Private Bank will New Product Offerings: You can expect to see new plan to offer. product offerings transition away from an underlying LIBOR reference to an alternative rate in 2021. (e.g. The development of a forward-looking term RFR will new GBP linked loans and swaps now reflect SONIA require deep and liquid derivative markets in RFR- rather than GBP LIBOR from 1 April 2021). Some linked products. Term SONIA has been published in the products may no longer be available using a LIBOR UK and Term SOFR is gaining momentum in the US. reference as we approach 2022. As an example, for USD LIBOR, US regulatory agencies encouraged banks Alternatively, the industry is relying on various rate to cease entering into new contracts that use USD methodologies to reduce reliance on availability on LIBOR as a reference rate as soon as practicable and in Term Rates. The most common methodology is to any event by 31 December 2021. compound RFR in arrears, which applies the average rate compounded daily over the relevant period, for Citi Private Bank does not provide tax advice. We example 1 month. There is further variability in how encourage you to obtain any potential tax implications the “Compounded in Arrears” methodology is applied, and to consider the impact on you and any potential which may have an impact to a hedge position when change in value of a product that you hold as a result applying industry standards. of a change in the benchmark for such product from LIBOR to a RFR or an alternative benchmark, using 3. Operational complexity: LIBOR is used in a multitude independent advisors if appropriate. Your overall impact of internal systems, models, processes and controls. should be considered using independent professional Citi Private Bank will be operationally ready in line with advisors beyond tax as appropriate. You can refer to industry expectations. the Citi Private Bank’s FAQs (https://www.privatebank. citibank.com/home/fresh-insight/benchmark- transitioning-away-from-libor.html), which provides guidance to a number of commonly asked questions across various products that our clients may hold. 3 Citi Private Bank may offer an interest rate swap using the same market conventions as the loan RFR, in most cases compounded in arrears with a 5-day lookback period. You should be aware that this rate will not be published by Bloomberg or other providers. You should therefore discuss with your independent advisor if this alternative to reduce basis exposure between the loan and the swap is most appropriate for you. This document was first prepared prior to the date indicated and may not have been updated to reflect recent market developments. It contains information on IBOR and benchmark reform that is intended for the use of Citi clients only and it should not be shared with third parties. The information this document contains is general and does not constitute advice. Citi accepts no responsibility or liability to you with respect to the use of this document or its contents. If you have questions in relation to the contents of this document, you should consider seeking independent professional advice (legal, tax, accounting, financial or other) as appropriate. Citi Private Bank is a business of Citigroup Inc.
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