PUBLIC LIBOR Transition Virtual Client Briefing Session 8 and 10 December 2020 sc.com | Here for good PUBLIC Introductory Remarks OUR PANEL Kamini Ryan Rambausek Goh Change Lead, Associate Director, IBOR Transition Rates Trading Programme Arpit Tiak Peow Mehrotra Phua Business Lead, Executive Director IBOR Transition Conduct, Financial Programme Crime and Compliance 1 PUBLIC 1. Introduction 1.1 Session Objectives The primary objectives of this virtual briefing session is to update on: ▪ Regulatory and industry working group developments as we progress in the transition away from London Interbank Offered Rate (LIBOR) and other IBORs. ▪ Our Bank’s capabilities to transact in Risk-Free Rates (RFRs) and offer RFR-linked products. 1.2 Key outcomes Help ensure you are kept up to date with the latest transition-related regulatory and market developments. Help you understand the developments in key product groups including the Bank’s RFR product capabilities. Help ensure you are aware of the important elements and considerations in your transition planning. Help ensure you are clear on the next steps on the Bank’s engagement with you as we move into 2021. 2 PUBLIC 2. Transition Timelines: Journey to date 2.1 Key milestones 2017 2018 2019 2020 Q2 The Sterling Overnight Q3 The Financial Conduct Q4 The European Central Q1 SOFR index introduced. Index Average (SONIA) Authority (FCA): “markets Bank (ECB) publishes and the Secured need to end their reliance the Euro Short-Term Overnight Financing on LIBOR post 2021”. Rate (€STR) as RFR to Rate (SOFR) are replace the Euro Q3 Central Counterparty (CCP) announced to replace Overnight Index Average discounting switch from GBP and USD LIBOR (EONIA). EONIA to €STR respectively. Alternative Reference International Swaps and Q3 FCA announces they will Q3 “Dear CEO” letter jointly Q4 Q4 no longer compel banks issued by the FCA and Rate Committee (ARRC) Derivatives Association to submit LIBOR. the Prudential Regulatory publishes summary of (ISDA) 2020 IBOR Authority (PRA) to 15 recommended fallback Fallbacks Supplement market participants. language to date for and Protocol USD cash products. Launch of the IBA Q4 Consultation 3 PUBLIC 2. Transition Timelines: IBA Consultation 2.2 IBA intention to consult on LIBOR setting cessation On 4 December 2020, ICE Benchmark Administration (IBA) has launched a consultation on its intention to cease the publication of LIBOR settings What is the proposed LIBOR publication cessation timeline? The IBA consultation is intended to provide market participants with details on its intention to cease publication of LIBOR settings from the following proposed dates: 31 December 2021 30 June 2023 ▪ EUR LIBOR: All tenors1 All remaining USD LIBOR settings including: ▪ CHF LIBOR: All tenors ▪ USD LIBOR – Overnight, one month, and three, six and twelve months ▪ JPY LIBOR: All tenors ▪ GBP LIBOR: All tenors ▪ USD LIBOR: One week and two month tenors How will the consultation work? The consultation is open to stakeholders including panel banks, industry bodies and end-users, who have until 25 January 2021 to provide feedback. The IBA will then publish a statement shortly afterwards summarising the responses to the consultation for all 35 LIBOR settings. What does this mean for USD LIBOR? If the proposals are adopted, USD LIBOR settings will continue for all but two tenors until 30 June 2023. The FCA has published a statement supporting the IBA announcements, as “this will incentivise swift transition, while allowing time to address a significant proportion of the legacy contracts that reference USD LIBOR”. The Fed has also supported this move, as the IBA and FCA statements “lay out a path forward in which banks should stop writing new USD LIBOR contracts by the end of 2021, while most legacy contracts will be able to mature before LIBOR stops.”. The continued expectation is that for new transactions, market participants should continue to actively transition away from LIBOR to RFR as soon as possible and no later than 31 December 2021. US regulators have also stated that entering into new USD LIBOR contracts after 31 December 2021 would create safety and soundness risks, and that firms should only expect very limited carve-outs for USD LIBOR use after end-2021. The FCA has also indicated that it will consult on restricting use of where a rate has known cessation date 1The tenors are: overnight, one week, one month and two, three, six and 12 months 4 PUBLIC 2. Transition Timelines: IBA Consultation 2.2 IBA intention to consult on USD LIBOR cessation extension Implications for LIBOR and remaining currencies due to IBA consultation Subject to the consultation outcome, what are the implications for clients? Potential Implications ▪ Despite the possible extension to cessation of USD LIBOR, the industry is in the final stages of LIBOR’s demise with the consultation designed to provide additional time to remediate certain existing USD LIBOR contracts ▪ Following the conclusion of the consultation, a cessation announcement or cessation announcements of all tenors of USD, GBP, JPY, CHF and EUR LIBOR settings could trigger the calculation of spread adjustments with a fixing on that announcement date for all of the LIBOR settings ▪ Based on the consultation, USD LIBOR is likely to remain representative until their proposed cessation dates. Firms will need to consider implications arising from these staggered cessation dates ▪ An extension would allow in scope USD LIBOR contracts maturing prior to July 2023 to expire without need for remediation ▪ Clients with USD LIBOR exposures maturing beyond June 2023 are stilll likely to remediate their contracts, pending any solution that may be proposed by the Alternative Reference Rate Committee (ARRC) and/or regulators What should market participants do now? Next steps The extended timeline for certain USD LIBOR settings set out a clear path to support USD LIBOR transition, and should not be viewed as a delay to transition by market participants. As such priorities for firms should remain largely unchanged: New Transactions ▪ Market participants should continue to consider and execute new transactions in Risk-Free Rates (RFRs) where possible, and ahead of industry milestones to stop using LIBOR in new transactions ▪ Where firms trade LIBOR products, they must ensure that appropriate hardwired fallbacks are put into place Existing LIBOR Exposures ▪ Firms should analyse their contracts by tenor and currency to identify the population of USD LIBOR transactions that mature prior to 30 June 2023 and monitor the outcome of the IBA consultation to determine the next steps on these contracts ▪ Develop scenarios and contingency plans for consultation outcomes, such as impacts on transaction pricing, hedging costs, resource requirements for contract remediation and client communications 5 PUBLIC 2. Transition Timelines: Key Upcoming Milestones 2.3 Q4 2020 to End 2023 Regulators and industry bodies have set key milestones to ensure as smooth and orderly transition as possible. Upcoming are: Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q4 2021 Targeted cessation of Targeted cessation of new Complete active Cease offering GBP Expected cessation Expected cessation new USD LIBOR GBP LIBOR cash conversion of LIBOR non-linear and of of USD LIBOR Floating Rate Notes issuances & linear GBP LIBOR cash cross-currency GBP,EUR,JPY,CHF (1w and 2M) (FRN) derivatives products derivatives LIBOR Q4 2021 2022 2023 2020 Q4 2020 Q1 2021 Q2 2021 H1 2021 Q1 2022 H1 2023 KEY INDUSTRY MILESTONES INDUSTRY KEY Expected forward- Effective Date of ISDA Cease new USD LIBOR ARRC EBR Transition Expected cessation looking Term Fallbacks business loans, recommends provisions end of USD LIBOR SONIA Reference Supplement and securitisations and forward-looking (O/N,1M, 3M, 6M Rates Protocol derivatives2 SOFR term rate and 12M) Today ILLUSTRATIVE LIBOR RFR 6 2https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC-Best-Practices.pdf PUBLIC 3. Updates on Other IBORs 3.1 To Be Discontinued/Discontinued IBORs Beyond the transition of the five key LIBORs, there are a number of other jurisdictions undergoing their own interest rate benchmark review, some of which are noted below. The Reserves Bank of India (RBI) noted a need to replace the Mumbai Interbank Forward Outright Rate India MIFOR (MIFOR), which uses USD LIBOR in its calculation, however no such replacement has been identified to date. The Philippine Interbank Reference Rate (PHIREF) utilises USD LIBOR as a calculation input. However, no Philippines PHIREF alternative has been identified to date. The Bankers Association of the Philippines, PHIREF’s administrator, intends to establish a replacement reference rate for PHIREF. The Singapore Interbank Offered Rate (SIBOR) is pending discontinuation in phases as follows; 12-month IBORs on January 2021, six-month after the end of 2021, one-month and three-month in 2024. The Swap Offer SIBOR & Singapore Rate (SOR) uses USD LIBOR in its calculation and therefore will be affected by a USD LIBOR SOR discontinuation. The Singapore Overnight Rate Average (SORA) has been identified the alternative benchmark The Central Bank decided to stop publishing Sri Lanka Interbank Offered Rate (SLIBOR) from July 2020 and market participants are encouraged to transition to alternative rates such as the policy rate, Average Sri Lanka SLIBOR Weighted Call Money Rate (AWCMR), Average Weighted Prime Lending Rate (AWPR), or Treasury bill yields. The Market Practitioners Group (MPG) raised concerns regarding Johannesburg Interbank Average Rate (JIBAR) in its current form, however until an alternative reference rate can be found, it will be reformed. The JIBAR & South Africa South African Reserve Bank implied that JIBAR may cease in 2024. In addition, the benchmark proposed as SABOR a replacement for South African Benchmark Overnight Rate (SABOR) is the South African Rand Overnight Index Average (ZARONIA), which is an unsecured overnight rate. The Bank of Thailand (BoT) has announced that all financial institutions must cease offering new Thai Baht To Discontinued Be / Discontinued Interest Rate Fixing (THBFIX) products from 1 July 2021.