London Interbank Offered Rate (LIBOR) Transition and Interbank Offered Rate (IBOR) Reforms
London Interbank Offered Rate (LIBOR) Transition and Interbank Offered Rate (IBOR) Reforms Background
Interest rate benchmarks including, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed.
Due to inadequacies in the way that the IBOR is determined, the UK Financial Conduct Authority (FCA) has stated that after 2021, it will no longer compel banks to submit rates used for the calculation of LIBOR. As a result, the application of LIBOR and other IBORs, will likely be discontinued after end of 2021. As LIBOR is a widely used benchmark for a variety of financial contracts and commonly adopted in financial markets to calculate interest rates or other payments in a wide range of financial products, such as loans, bonds and derivatives, it is important that you become aware of the facts related to the transition to a replacement rate.
Regulators and central banks have announced that Risk Free Rates (RFRs), based on actual overnight money market transactions, are to replace LIBOR and other similar IBORs around the world. Existing RFRs include the Sterling Over Night Index Average (SONIA) in the UK, the Secured Overnight Financing Rate (SOFR) in the U.S., and the Euro Short-Term Rate (€STR) in the euro area.
The implication of the above is that existing LIBOR-linked contracts that extend beyond 2021 will need to be amended to prevent potential disputes. Specifically, this process will require contracting parties to either agree on an alternative RFR ahead of the discontinuation of the IBOR, or to use fallback provisions that will determine the replacement rate when IBOR becomes unavailable. Fubon Bank (HK) will be reaching out to customers with exposures or contracts that reference LIBOR to discuss next steps.
Customers are also advised to prepare for the LIBOR transition by taking the following actions:
- Assess their LIBOR exposure
- Identify contracts which need to be replaced with an alternative reference rate
- Be aware of the alternative reference rates being proposed to replace LIBOR
- Prepare to replace LIBOR with the identified alternative reference rates
We will keep you updated on the latest developments as well as the industry best practices related to the benchmark transition.
In the meantime, please refer to the publication from the Treasury Markets Association (TMA) entitled “Transitioning Away from LIBOR: Points to Note for Corporate Treasurers". This document explains how the benchmark transition will impact the corporate sector and what steps corporates should take to prepare themselves for transitioning away from LIBOR through a series of Q&As as set out therein.
Hyper Link to the Note:
http://www.tma.org.hk/FixingsFile/LIBOR_Transition_Points_for_Corporate_Treasurers.pdf?161 We recommend you to read this publication carefully as such information will enable you to contribute to a smooth transition away from LIBOR. Should you have any queries, please contact your Relationship Manager or call 2566 8181 (press 3 after language selection) during office hours
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^Monday to Friday: 9 am to 7 pm; Saturday: 9am to 1pm (except public holidays).
Fubon Bank (Hong Kong) Limited
Frequently Asked Questions
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1. What are the new alternative reference rates that will be replacing LIBOR?
- In the five LIBOR currency areas (i.e. USA, UK, Euro Zone, Switzerland and Japan), relevant authorities have identified transaction based overnight interest rates as the alternative reference rates for LIBOR. The new alternative reference rates will replace the relevant IBOR for each currency. Alternative reference rates (ARRs) will be based on market transactions and valuations. The table summarises major IBORs to be replaced by alternative reference rates is as below:
| Currency |
Current rate |
Alternate Reference Rate |
Anticipated Approach |
| USD |
USD LIBOR |
Secured Overnight Financing Rate (SOFR) |
Transition to SOFR |
| GBP |
GBP LIBOR |
Sterling Overnight Index Average (SONIA) |
Transition to SONIA |
| EUR |
EURIBOR or EUR LIBOR |
Euro Short Term Rate (ESTR) |
Multiple rate approach. The reformed EURIBOR is currently expected to continue alongside ESTR. EUR LIBOR is expected to be discontinued (probably sometime after 2021) |
| CHF |
CHF LIBOR |
Swiss Average Rate Overnight (SARON) |
Transition to SARON |
| JPY |
JPY LIBOR or TIBOR |
Tokyo Overnight Average Rate (TONAR) |
Multiple rate approach. JPY TIBOR is expected to continue alongside TONAR |
| HKD |
HIBOR |
Hong Kong Dollar Overnight Index Average (HONIA) |
Multiple rate approach. HIBOR is expected to continue alongside HONIA |
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2. What about HIBOR? Will HIBOR be discontinued?
- At present, there are no plans to discontinue the use of HIBOR as it is still regarded as a reliable financial benchmark. However, in-line with recommendations from the Financial Stability Board (FSB), industry organizations such as The Treasury Markets Association have suggested using the Hong Kong Dollar Overnight Index Average (HONIA) as an alternative reference rate (ARR).
It is anticipated that both HONIA and HIBOR will co-exist in the market, allowing market participants to choose between the two at their discretion. Should HONIA-based products become increasingly available, it is expected that the transition process will be smoother should market circumstances one day require HIBOR to be discontinued
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3. How are these Alternative reference rates different from IBORs?
- Alternative reference rates (ARRs) are interest rates to be used for replacing IBORs as the primary benchmark measure as recognized by the relevant authorities. Given that ARRs will be determined based on robust underlying transactional data, the need for judgement is removed. Whereas IBOR is backed only by a limited number of underpinning transactions, ARRs are more transparent because they are based on real transactions in active markets representing the overnight risk-free reference rate (RFR). Accordingly, this makes the ARRs less vulnerable to manipulation and more reliable as a reference rate. However, ARRs are based on historical transactions meaning that they are backward-looking instead of forward-looking rates, as IBORs are. This implies that alternative reference rates may not have a term structure like IBOR (e.g. 1 month, 3-month, 12-month LIBOR etc.) which can be used to determine the future interest for different periods.
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4. What do these reforms mean for Fubon Bank clients?
- Products and services of Fubon Bank that customers are using or will be provided with in the future will be impacted. The extent of the impact will depend on the following factors:
- which IBOR is referenced;
- the nature of the “fallback” provisions;
- the adjustment for credit and term differences (i.e. between the IBOR and the alternative reference rates) defined by industry working groups;
- the term of the product or contract;
- the date when the changes will take effect; and
- the nature of the product.
The reforms could have a number of impacts on clients including possible changes to contractual documentation, changes to the value of products, update of operational processes and adaption IT systems.
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5. What is Fubon Bank doing to mitigate the impact of any changes for clients?
- The discontinuation of LIBOR and other IBORs may have an impact on both new and existing products and services offered by Fubon Bank (HK). However, we are committed to making this transition as seamless as possible. We expect that applicable existing LIBOR-Linked contracts and exposures will need to be transitioned to replacement rates in due course. Specifically, this process will require contracting parties to either agree on an alternative RFR ahead of the discontinuation of the IBOR, or to use fallback provisions that will determine the replacement rate when IBOR becomes unavailable. Accordingly, we will be in communication with affected customers to discuss next steps. Note that new facility letters issued from 1 January 2021 onwards will also contain the above-mentioned fallback provisions. In the meantime, Fubon Bank will continue to inform customers on the latest developments surrounding the new benchmarks rates and the application methodologies being adopted in the industry.
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6. What do I need to do now? How do I prepare for LIBOR reform?
- Both corporate or retail customers should take steps to identify and review all existing investments and contracts that use LIBOR as the reference rate, such as syndication loans, derivatives and floating rate notes. If the contracts do not contain provisions mentioning how LIBOR will be replaced when it becomes unavailable, customers should discuss with the relevant banks and counterparties to build in fallback provisions or to agree on alternative reference rates. Customers should also avoid entering into new contracts with LIBOR as reference rates maturing beyond 2021. Moreover, customers are recommended to follow the latest progress of product offerings referencing alternative reference rates in the market.
Note:
The information reflects Fubon Bank's latest understanding of IBOR transition. Due to the current level of uncertainty, this overview is not complete or exhaustive and does not constitute any form of advice or recommendation. Customers should consult their own professional advisors on the possible implications of IBOR transition, such as financial, legal, accounting or tax consequences.
