Preparing for benchmark interest rate reform
Benchmark interest rates are widely used across the global economy for calculating interest rates and valuations in relation to a wide variety of financial contracts, such as derivatives, bonds, loans, consumer lending products.
Global regulators are concerned about the robustness of benchmark interest rates such as LIBOR and expect market participants to plan for no LIBOR publication after the end of 2021.
LIBOR Cessation Update
The majority of LIBOR panels ended at the end of 2021, meaning their settings ceased or are permanently unrepresentative.
The LIBOR settings that have ended are:
- all euro and Swiss franc LIBOR settings
- the overnight / spot next, 1-week, 2-month and 12-month sterling and Japanese yen LIBOR settings
- the 1-week and 2-month US dollar LIBOR settings
It has been announced that USD LIBOR will remain published and representative for overnight, 1-month, 3-month, 6-month and 12-month US dollar LIBOR settings until end-June 2023, when transition to appropriate alternative rates will occur. Barclays will follow US Federal Reserve guidance on reducing USD LIBOR exposures, including following SOFR First principles and restrictions on new USD LIBOR exposures (see US updates section below).
Barclays is aware that transition to alternative rates, often referred to as Risk Free Rates (RFRs) differs for those currencies where LIBOR has ceased to be published and/or representative. It is also at a differing stage with specific relation to US Dollar LIBOR. Barclays continues to expect that the timing of remaining transitions away from relevant interbank offered rates will take into account a number of factors: regulatory requirements, liquidity in the replacement RFR, the potential development of robust RFR-based term rates, development of any relevant industry conventions and the speed with which participants in the various derivative, bond and lending markets transition away from interim LIBOR rates, known as Synthetic LIBOR, or USD LIBOR. While we expect that all of the aforementioned factors are taken into account in terms of transition, we must be clear that the process is bound by regulatory deadlines.
Please note Synthetic LIBOR is defined and explained below, in the GBP updates section.
We have followed the milestones set out by the various Risk-Free Rate Working Groups with respect to providing LIBOR-linked products maturing after the end of 2021, and continue to explore ways to reduce our remaining footprint in relation to LIBOR-linked products.
The FCA published this article on 4 January, 2022 in respect of cessation of 24 LIBOR settings and changed publication methodology for the 6 most-used sterling and Japanese yen settings.
The LIBOR settings that have ended are:
- all euro and Swiss franc LIBOR settings
- the overnight / spot next, 1-week, 2-month and 12-month sterling and Japanese yen LIBOR settings
- the 1-week and 2-month US dollar LIBOR settings
Six LIBOR settings (the 1, 3 and 6 month sterling and Japanese yen LIBOR settings) are now permanently unrepresentative of the underlying market they seek to measure. This is because the panel of banks, which used to provide submissions to create these rates, has now ended. From 4 January, 2022, these 6 LIBOR settings will be calculated in a way that does not rely on submissions from panel banks, generally known as 'synthetic' LIBOR.
For further information, including the use of synthetic LIBOR and the prohibition on new use of US dollar LIBOR, please see this article.
Please be aware that the United Kingdom’s Financial Conduct Authority (FCA) published an announcement on 5 March 2021 on the future cessation and loss of representativeness of LIBOR benchmarks. The announcement followed the completion of the ICE Benchmark Administration Limited (IBA) consultation on its intention to cease publication of LIBOR in its various currency-tenor settings as the administrator of LIBOR.
On 29 September 2021, the FCA confirmed it would compel the ICE Benchmark Administration (IBA) to continue publishing 1-, 3- and 6-month sterling and Japanese yen LIBOR settings on a ‘synthetic’ basis throughout 2022.
The FCA also published a consultation on its proposed decisions on using Article 23C and Article 21A powers under the Benchmark Regulation (BMR), relating to the legacy use of synthetic LIBOR and restrictions on new uses of US dollar LIBOR, respectively, the FCA sought responses to the consultation by 20 October 2021 and will confirm its final decisions as soon as practicable.
The FCA has now confirmed that synthetic LIBOR will be calculated by adding the relevant fixed spread adjustment that applies as part of ISDA’s 2020 IBOR Fallbacks Protocol and Supplement 70 of the 2006 ISDA Definitions, to the relevant risk-free-rate (RFR)-based forward-looking term rate.
The FCA confirmed after the consultation that closed in October 2021:
- The new calculation methodology will be permitted for legacy use of all 6 settings for which synthetic LIBOR is published, across all products except cleared derivatives. The synthetic rates will be available for contracts which cannot be transitioned before end-2021, but will not be permitted for use in any new business.
- Japanese yen synthetic LIBOR will only be available for a period of one year, as the FCA does not intend to require IBA to publish the Japanese yen settings beyond end-2022. The FCA will review the requirement for IBA to publish the 3 sterling settings on an annual basis, for a maximum of 10 years.
- The FCA will consider a gradual reduction of synthetic LIBOR permissions in order to ensure work to reduce outstanding legacy LIBOR contracts continues.
The FCA confirmed it has not yet made a decision on whether to require IBA to continue publication of any US dollar LIBOR settings after end-June 2023.
On 15 October 2021, the FCA published a Q&A page on their website, designed to address queries firms and clients may have in relation to their use of powers under the BMR.
Barclays is not able to provide legal, financial and/or tax advice. You should seek independent legal, financial and/or tax advice in order to ascertain what the FCA announcement means for you and the LIBOR referencing products and services you may have exposure to.
On 23rd October 2020, ISDA launched a supplement (the “Supplement”) amending the 2006 ISDA Definitions to include new IBOR fallbacks. The Supplement came into effect on 25th January 2021 and will be automatically incorporated into any new derivatives transaction which incorporates the 2006 ISDA Definitions entered into on or after 25th January 2021.
The IBOR Protocol was also launched on 23rd October 2020 to enable market participants to incorporate IBOR fallbacks into legacy non-cleared derivatives transactions. The IBOR Protocol came into effect on 25th January 2021. Market participants who adhere to the IBOR Protocol agree, as between adhering parties, their legacy derivatives (and certain non-derivatives contracts i.e. securities financing transactions, that are within the scope of the IBOR Protocol) will be amended to include the relevant fallbacks.
Whilst the IBOR Protocol will apply to non-cleared derivatives transactions, for legacy cleared derivatives transactions certain CCPs have indicated they will use the powers in their rule books to implement the same fallbacks as of the effective date of the Supplement/IBOR Protocol.
ISDA has produced a factsheet, a FAQ and brochure with further information on IBOR transition. Bloomberg has also published a factsheet, rule book and technical note with further information on the implementation of fallbacks and the calculation of near risk-free rates.
Further information and updates can be found on the ISDA website
We have also drafted our own FAQ document on the Protocol and further information on our adherence.
Barclays has adhered to the IBOR Protocol for its major derivative trading entities (The list of all adhering entities (including Barclays entities) can be found on the ISDA website here)). If you also decide to adhere to the IBOR Protocol, legacy transactions you have with us that are within the scope of the IBOR Protocol will be amended in accordance with the IBOR Protocol. As the IBOR Protocol does not include all benchmarks in its scope, the consequences of discontinuation of any benchmark outside the IBOR Protocol (e.g., CMS, ICE Swap Rate, EONIA) are unpredictable, and your transactions may be adversely impacted. You need to make your own decision as to whether to adhere to the IBOR Protocol based on your individual circumstances, including your IBOR-linked exposures, and assess the potential risks of adhering versus not adhering, in each case either on your own or through independent professional advisors (legal, accounting, financial, tax, or other), as appropriate. This should include evaluation of the changes introduced by the IBOR Protocol including the consequences of a change in interest rate methodology and the impact of the non-representativeness or discontinuation of any IBOR referenced in your transactions. You must satisfy yourself as to the appropriateness or suitability of adhering to the IBOR Protocol and any possible adverse outcome therefrom (including current IBOR transactions ceasing to function as originally intended in respect of certain non-linear products after fallback rates become effective and any potential transfer of economic value). Barclays accepts no responsibility or liability for, and makes no representation or warranty, express or implied, as to, any such risks or consequences. Barclays is not acting as your fiduciary or advisor and is not responsible for assessing the appropriateness or suitability for you of adhering to the IBOR Protocol.
The Working Group on Sterling Risk-Free Reference Rates (UK RFRWG) published a statement in December 2021, encouraging continued focus ahead of the cessation of most LIBOR panels, including GBP LIBOR at end-2021. The full statement can be accessed here.
The UK RFRWG had previously recommended that by 30 Sep 2021, all legacy GBP LIBOR contracts in 2021 that would expire after end-2021 should be actively converted away from LIBOR. If active conversion was not viable, parties were encouraged to ensure robust fallbacks are adopted where possible.
However, the RFRWG recognised there were ‘limited circumstances’ where it may be appropriate to transact new GBP LIBOR-linked linear derivative contracts expiring after end 2021. These circumstances generally pertain to risk management of existing positions and are listed in the RFRWG’s publication. Exceptions were expected to be kept to a prudent minimum.
Synthetic Sterling LIBOR
In order to ensure an orderly wind down of legacy LIBOR contracts, on 29 September 2021, the United Kingdom’s Financial Conduct Authority (FCA) confirmed it would compel the ICE Benchmark Administration (IBA) to continue publishing 1-, 3- and 6-month sterling and Japanese yen LIBOR settings on a ‘synthetic’ basis throughout 2022.
The FCA have stated that synthetic LIBOR is only permitted for use on legacy contracts, where all other methods of transition have been exhausted. The FCA have continually stressed that market participants must continue to actively transition their contracts away from LIBOR wherever possible notwithstanding the publication of synthetic rates and that it must not be assumed that synthetic sterling LIBOR will be available beyond end-2022.
CME SOFR First for Options Initiative
The Alternative Reference Rates Committee (ARRC) has welcomed CME Group’s recent announcement on the launch of Secured Overnight Financing Rate (SOFR) First for Options, and encourages further industry support. SOFR First for Options is a market-wide initiative geared toward accelerating adoption and liquidity in SOFR options, during the months of June and July.
This significant initiative is consistent with supervisory guidance and the ARRC's recommendation to cease entering into new LIBOR contracts immediately, as well as Commodity Futures Trading Commission Market Risk Advisory Committee's SOFR First recommendation.
SOFR First for Options aims to accelerate the expansion of Secured Overnight Financing Rate (SOFR) options trading, and includes additional steps which will build on the already significant growth observed in SOFR Futures. It will help to expedite successful transition of the exchange-traded options market, one of the last key markets still required to move away from U.S. dollar (USD) LIBOR ahead of its cessation in June 2023.
On 30 November 2020, US banking regulators released a joint statement, which stated that banks should ‘cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021’.
Regulators have acknowledged there are limited exceptions where it may be appropriate for banks to enter into new US dollar LIBOR contracts:
- market making in support of client activity related to US dollar LIBOR transactions executed before 1 January 2022;
- transactions that reduce or hedge a supervised entity’s or any client of the supervised entity’s US dollar LIBOR exposure on contracts entered into before 1 January 2022;
- novations of US dollar LIBOR transactions executed before 1 January 2022;
- transactions executed for purposes of participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting US dollar LIBOR exposure; and
- interpolation or other use provided for in contractual fallback arrangements in connection with the USD LIBOR settings that will cease at 31 December 2021 (the 1-week and 2-month US dollar LIBOR settings)
On 16 November 2021, the FCA released its final decisions on using Article 21A powers under the BMR, to legally restrict the new use of US dollar LIBOR. The announcement reiterated that new use of US dollar LIBOR is prohibited unless under the limited exceptions.
“SOFR First” Initiative
The “SOFR First” Initiative represents a prioritization of interdealer trading in the Secured Overnight Financing Rate (SOFR) rather than USD LIBOR. This initiative, which is endorsed by the United States Alternative Reference Rates Committee (ARRC), will contribute to the transition away from USD LIBOR for derivatives and related contracts.
“SOFR First” recommendations are focused on the interdealer market only, and therefore do not impact availability of USD LIBOR linear swaps in dealer-to-client transactions
Key Timelines associated with “SOFR First”
From 26 July 2021, interdealer brokers should replace trading of LIBOR linear swaps with trading of SOFR linear swaps. The MRAC Subcommittee on Interest Rate Benchmark Reform (MRAC Subcommittee) has recommended that interdealer broker USD LIBOR linear swap screens should remain available for informational purposes, but not for trading activity, until 22 October 2021, after which point they should be turned off.
From 21 September 2021, interdealer brokers should replace trading of LIBOR XCCY swaps with trading of RFR XCCY swaps.
From 8th November 2021, interdealer brokers should replace trading of LIBOR non-linear derivatives with trading of SOFR non-linear derivatives. For purposes of the “SOFR First” Transition Initiative, USD non-linear derivatives include swaptions, caps and floors.
From 13 December 2021, interdealer brokers should change the USD LIBOR leg of newly-executed XCCY derivatives to SOFR.
The UK Financial Conduct Authority (FCA) and the Bank of England (BoE) have both made statements supporting and encouraging all participants in the interdealer USD interest rate swaps market to take the steps necessary to prepare for and implement these changes.
The Euro Overnight Index Average (EONIA) was discontinued on 3 January, 2022, and replaced by the Euro Short Term Rate (€STR). Previous to this, and per the €STR First recommendation of the Working Group on Euro Risk-Free Rates (EUR RFRWG), the interdealer market had been working to change their swap quoting conventions from EONIA to €STR from 18 Oct 2021.
ISDA EONIA Collateral Agreements Fallbacks Protocol
ISDA published the EONIA Collateral Agreement Fallbacks Protocol in August 2021, offering market participants an efficient way to amend the terms of their collateral agreements to incorporate a fallback to €STR Modified upon the cessation of EONIA. Barclays has adhered to this Protocol for Barclays Bank PLC and Barclays Bank Ireland PLC.
The Euro Overnight Index Average (“EONIA”) became increasingly fragile in recent years due to low volumes and the decline of panel banks members. Consequently, based on the recommendation from the EUR RFR Working Group, the methodology and publication time (e.g. moved to T+1) were changed and since October 2019, EONIA became a tracker rate to the Euro Short-Term Rate (“€STR”), the risk-free rate selected by the EUR RFR Working Group, and is now equal to €STR + a fixed spread of 8.5 bps. €STR will replace EONIA on 3 January 2022 when EONIA is scheduled to be discontinued.
No potential cessation date has been set for EURO Interbank Offered Rate (“EURIBOR”) which completed reforms of its methodology in Q4 2019. The European authorities believe reformed EURIBOR can exist beyond 2021 and no indication has been given that EURIBOR is likely to cease anytime soon.
The EUR RFR WG published responses to public consultations on EURIBOR Fallback Trigger Events and Fallback Rates, as well as subsequent recommendations, which can be found here.
LIBOR-linked products in the JPY market transitioned to the alternative benchmark rate TONA (Tokyo Overnight Average) on 3 January, 2022.
On 10 December, 2021 Refinitiv, the TRS administrator, announced the future permanent cessation of the JPY LIBOR Tokyo Swap Rate after the end of 2021.
ISDA has published guidance for parties to over-the-counter derivative transactions that are affected by the announcement made on 10 December, 2021 which can be found here
The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks (JPY RFRWG) published their roadmap in early 2021, expecting that by 30 Sep 2021, market participants would have significantly reduced LIBOR linked cash product (bonds and loans) exposures, and ceased initiation of new JPY LIBOR IRS maturing beyond end 2021, adopting alternative reference rates for JPY LIBOR, with the exception of risk management purposes .
The JPY RFR Working Group, part of the Bank of Japan (BoJ), released an announcement in late July 2021 on TONA First go-live dates and scope of products. It recommended that JPY Interest Rate Swaps (IRS) linear products, carried out in the interbank market via voice brokers, should be ceased altogether after 30 July, 2021.
All market participants were expected to cease trading JPY IRS by 30 September, 2021, based on the industry milestone.
Please see links below for more details.
(Further updates and information will be published on this website when they become available)
LIBOR-linked products in the CHF market transitioned to the new benchmark rate SARON (Swiss Average Rate Overnight) on 1 Jan, 2022.
The National Working Group (NWG) of the Swiss National Bank (SNB) informed market participants in 2021 that a SARON Term Rate would not be published. The European Commission Implementing Regulation has designated a statutory replacement rate for all four tenors (e.g. 1, 3, 6 and 12 month) of CHF LIBOR calculation of the statutory rate, for contracts without fallback provisions. This consists of the ISDA credit spread adjustment added to the designated replacement SARON compounded rate for each relevant tenor. Further details of the calculations can be found here.
The SNB noted that, as of May 2021, turnover in the CHF swap market was 60% SARON-based. In order to promote a smooth transition to SARON in CHF Markets, the NWG for Swiss France Reference Rates (part of SNB) recommended the use of only SARON-based derivatives for new transactions starting from 1 July 2021, excluding transactions that reduce or hedge LIBOR exposures.
In addition, they recommended that all market participants (investors and issuers) should switch to the SARON swap curve as the only pricing reference starting 1 September 2021, at the latest.
SOR and SIBOR
The Singapore Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR) were discontinued on 3 January, 2022 and replaced with the Singapore Overnight Rate Average (SORA).
The Steering Committee for SOR and SIBOR transition to SORA (SC-STS) timelines specified that by 30 Sep 2021:
- use of SOR in new derivatives contracts must cease, except for specific purposes relating to the risk management and transition of legacy SOR positions to SORA (SORA has been identified as the alternative reference rate);
- financial institutions should work to decrease their gross exposure (including centrally cleared interbank transactions) to 20% as of year-end 2019 exposure, relative to the stock of outstanding derivatives; and
- use of SIBOR in new contracts must cease.
Background, approach and how to prepare
For several years, global regulators and central banks have been driving international efforts to reform key benchmark interest rates to make them more reliable. These reforms are happening in many jurisdictions, such as the United Kingdom, the Euro area, the United States, Switzerland, Canada, Japan, Hong Kong, Singapore and Australia.
A key focus of these reforms is to ensure that widely used benchmarks are credible and robust. Regulators have been clear that this means benchmarks should be based upon transactions to the greatest extent possible.
In July 2014, the Financial Stability Board, an international body that monitors and makes recommendations intended to promote financial stability, issued a report expressing concerns about the ‘reliability and robustness of existing interbank benchmark rates. The Financial Stability Board recommended a two pronged approach to reform benchmarks.
- Strengthen existing Interbank Offered Rates (IBORs) by underpinning them to the greatest extent possible with transactions data
- Develop alternative, nearly risk-free reference rates (RFRs)
What is LIBOR & why is it being replaced?
The London Interbank Offered Rate (“LIBOR”) is a daily benchmark interest rate calculated as an average of panel bank submissions and provides indication on the rate banks pay to borrow unsecured money across five currencies (British Pound Sterling, Euro, Japanese Yen, Swiss Franc and US Dollar) and seven tenors (overnight, 1 week, 1, 2, 3, 6 and 12 months) and used for the purposes of financial contracts, as a reference rate; including for calculating interest. Its administrator, ICE Benchmark Administration (IBA), publishes LIBOR rates every applicable London business day. LIBOR is widely used across the global economy for calculating interest rates and valuations in relation to a wide variety of contracts, such as derivatives, bonds, loans and consumer lending products.
Despite reforms in the governance and submission methodology of LIBOR, which now anchor the benchmark in “transactions to the greatest extent possible”, few transactions in the short-term money market actually occur now as banks have changed the way they fund themselves. Regulatory measures implemented after the 2008 financial crisis, to strengthen banks’ balance sheets, have reduced the utility of unsecured interbank borrowing in the money markets. These are the same transactions upon which LIBOR submissions are based.
Regulators’ concerns about the continued use of LIBOR remain elevated. In a key regulatory speech in 2017, the Chief Executive of the Financial Conduct Authority (FCA), Andrew Bailey, clearly articulated the continuation of LIBOR was at risk: “Our intention is that, at the end of , it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR. It would therefore no longer be necessary for us to sustain the benchmark through our influence or legal powers.”
More recently at an Alternate Reference Rate Committee Roundtable speech in 2019, Randal Quarles, Chair of The Financial Stability Board, stressed that the “ Clarity on the exact timing and nature of the LIBOR stop is still to come, but the regulator of LIBOR has said that it is a matter of how LIBOR will end rather than if it will end, and it is hard to see how one could be clearer than that.”
The United Kingdom’s Financial Conduct Authority (FCA) published an announcement on 5 March 2021 on the future cessation and loss of representativeness of LIBOR benchmarks.
The FCA’s announcement confirms that all LIBOR settings will either cease to be published by an administrator or be provided on a representative basis in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings immediately after 31 December 2021. The same will apply to the remaining US dollar settings after 30 June 2023 (see here for further detail)” (link goes to FCA section at top of page)
A keynote speech was delivered by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, at the UK Finance's Commercial Finance Week on 5 July 2021, emphasising that, with 6 months to go until LIBOR ceases, efforts should be sustained in order to maintain momentum of the transition.
What is replacing LIBOR
Global regulators formed currency-specific working groups to assess market conditions, examine alternatives and consider next steps. Members of these working groups include banks, asset managers, insurance companies, and corporates. Industry bodies and trade associations representing various segments of the market are also actively engaged.
These efforts have resulted in the identification of Risk-Free-Rates (RFRs), for each of the LIBOR currencies, which are based upon overnight transactions; however, these are not the only identified alternatives. While it is expected that RFRs will become the norm for derivatives, securities and wholesale loans, regulators have highlighted the usage of other variable rates or fixed rates for some market participants. An example of this in the UK, is the Bank of England Bank Rate, which is already widely used in mortgages and for some retail lending where simplicity and transparency of the rate are seen as priority.
Currency Existing Rate Alternative Rate Transaction Type USD LIBOR SOFR, Secured overnight financing rate Secured EUR* LIBOR, EURIBOR €STR, Euro short term rate Unsecured GBP LIBOR SONIA, Sterling overnight index average Unsecured JPY LIBOR TONA, Tokyo overnight average Unsecured CHF LIBOR SARON, Swiss average rate overnight Secured
The Euro Short Term Rate (“€STR”) is intended to replace the Euro Overnight Index Average (“EONIA”), at the end of 2021. No potential cessation date has been given for EURIBOR
For information on other key jurisdictions please download our world map (PDF 315KB)
What is happening with EURIBOR & EONIA?
EURIBOR, (EURO Interbank Offered Rate) completed reforms of its methodology in Q4 2019. The European authorities believe reformed EURIBOR can exist beyond 2021, and no indication has been given that the benchmark is likely to cease anytime soon. However, EONIA, the Euro Overnight Index Average, became increasingly fragile in recent years. Consequently, the methodology was changed in October 2019 and EONIA became a tracker rate to €STR, the RFR identified by the Euro working group. It is expected publication of EONIA will cease on 3 January 2022.
What are RFRs?
The acronym “RFR” was introduced by the Financial Stability Board in their 22 July 2014 publication on benchmark interest rate reform. The phrases ‘near risk-free rates’, ‘risk-free rates’ and ‘alternative reference rates’ are generally accepted as interchangeable and these should be considered to refer to the same: reference rates which are being developed by international, central bank led working groups as alternatives to LIBOR.
RFRs have a number of differences when compared to LIBOR, including:
- Each currency has its own distinct RFR and administrator;
- RFRs are overnight rates, not rates for a longer term such as three or six months. As such, there is very little perceived credit risk or term premium associated with RFRs;
- Some market participants have expressed the need for a RFR based term rate, in order to know the applicable interest rate in advance of any payments to be made. Each of the RFR working groups is considering if it will be feasible to produce a robust term rate. The Swiss group has stated it will not be possible in that market;
- RFRs are based on a large number of overnight money market transactions, so the risks associated with expert judgment do not arise;
- The underlying volumes representing the indices which determine the RFRs are much higher than LIBOR;
- Whilst all LIBORs are unsecured rates not backed by any exchange of collateral, two of the five RFR working groups selected secured, or collateralised, rates for their respective currencies based on transactions in their respective government security repo markets.
Risks to consider
The path to transition away from LIBOR is complex. The alternative reference rates are calculated on a different basis to LIBOR. Market and industry conventions for alternative reference rates are expected to vary between certain products and markets; these conventions continue to develop and may change over time. Various jurisdictions are at different stages of transition, and are moving at different speeds towards, potentially different outcomes. It is difficult to imagine a ‘one size fits all’ approach or solution.
Transition will affect both new and existing products referencing these key interest rate benchmarks. The consequences of reform are unpredictable and may have an adverse impact on any financial instruments linked to, or referencing, any of these benchmarks.
Counterparties that hold and/or enter into transactions that reference interest rates benchmarks that are subject to reform or cessation may be exposed to potential risks. These risks include, but are not limited to, the following:
- The existing agreements may not fully cater for a scenario where the LIBOR benchmark permanently ceases or is no longer representative, including that the agreement may not have any express fallbacks or have fallbacks that are not effective
- The fallback interest rate calculation provisions of the relevant agreement may become operative, which may impact the expected performance of the transaction or product
- Some changes to contractual documentation may be required. This may include changes relating to the calculation of interest and other payments, which may impact the amount counterparties pay or receive and/or other terms of the relevant agreement that reference LIBOR
- Mismatches (including economic mismatches) may occur if the fallback wording for linked transactions differ: this could be in respect of the underlying reference rate the transactions fall back to and/or the timing of when fall back wording becomes operative. For example, an interest rate swap (hedge) may have different fallbacks to a loan (underlying transaction)
- Methodologies for determining an alternative reference rate and/or calculating a potential credit adjustment spread (which may be necessary for the transition to be as economically neutral as possible) may vary across different types of products and jurisdictions
- It may be necessary to implement new operational processes or systems and/or amend existing ones to support alternative reference rates
- The value of products may change or products may no longer serve the purposes or function as originally intended. For example, as liquidity in LIBOR falls due to to a decrease in the number of LIBOR-referencing underlying transactions, LIBOR and LIBOR-referencing products and transactions may become more volatile
- Alternative reference rates may be materially different from LIBOR interest rate benchmarks which could result in unexpected changes in the performance of the underlying products or transactions
- Barclays may have rights to exercise discretion to determine a replacement rate for interest rate benchmarks linked to a transaction or product
- Interest rate benchmark reform may also result in a variety of tax, accounting and regulatory implications
- Barclays may, in accordance with the relevant rules or methodology of a Barclays index or other quantitative investment strategy, have rights to determine a replacement rate for interest rate benchmarks that feature as a component of such index or strategy and to make any necessary modifications to the methodology as a consequence. The use of a replacement rate and related adjustments may affect the performance of the index or strategy.
- Products linked to or referencing a Barclays proprietary index or strategy in which LIBOR represents a substantive component or signal may be significantly affected if no appropriate substitute benchmarks are available
Market participants are encouraged to evaluate their individual circumstances and review their LIBOR-linked exposures. Except where we otherwise agree with you in writing, Barclays does not provide advice, or recommendations on the suitability of your product choice or financial solution. We encourage all market participants to develop a sufficient understanding of the latest developments in LIBOR reform, any exposure they may have to LIBOR benchmarks, along with any expected and potential changes as a result of LIBOR transition and how these changes may impact them and/or their organisation, using independent professional advisors (legal, accounting, financial, tax or other) as appropriate.
Should you require further information on LIBOR transition, the other areas of the website contain a number of resources including FAQs and useful external links.
Intermediaries and Distributors can click here (PDF 89KB) for information on the impact of RFRs on Floating Rate Note (FRN) coupon interest rate payments.
If you wish to discuss any of the risks associated with LIBOR Transition in more detail, please reach out to your Barclays point of contact.
What is Barclays doing to prepare for LIBOR Transition
- Barclays continues to support the benchmark interest rate reform agenda as set out by the Financial Stability Board in 2014 and subsequently driven by the international risk free rate working groups and relevant supervisory authorities. We are actively engaged in the reform agenda and along with participating in various industry conferences and events discussing LIBOR transition, Barclays is a member of the US, EU, Japan and Singapore working groups. More prominently, Barclays chairs the Working Group on Sterling Risk-Free References Rates.
- As instructed by the Bank of England Prudential Regulatory Authority and the UK Financial Conduct Authority, Barclays planned for the base case scenario that LIBOR will no longer be available after 2021.
- Barclays has mobilised an enterprise-wide programme with Senior Manager oversight, to coordinate its global efforts in relation to the transition.
- Barclays is also aware that transition to RFRs is at different stages depending on the jurisdiction, and moving at different speeds. This also applies to the potential development of RFR-based term rates.
- Barclays expects that the timing of any transition away from relevant interbank offered rates to take into account liquidity in the replacement RFR, the potential development of robust RFR-based term rates, development of any relevant industry conventions and the speed with which participants in the various derivative, bond and lending markets transition away from LIBOR.
Corporate and Investment Bank Clients
We have previously sent communications to clients of the Corporate and Investment Bank, in order to highlight some of the risks market participants should consider and suggest what steps could be taken to prepare for LIBOR cessation, and have also ensured that clients with facilities yet to transition are aware of the processes and rationale behind Tough Legacy and Synthetic LIBOR.
For more information on Corporate Banking Products please visit our website.
Private Bank Clients
We have previously sent communications to clients of the Private Bank in order to highlight some of the risks market participants should consider and suggest what steps could be taken to prepare for LIBOR cessation.
What should market participants do to prepare
Given the use of LIBOR in relation to many financial products, any potential cessation of publication could have a financial and operational impact. It is therefore important that market participants seek to understand how this affects them and that this may now differ depending on which LIBOR setting applies. This may be achieved by taking some initial steps, including (though not necessarily limited to):
For non-USD LIBOR products
- Identify which products they use that reference LIBOR;
- Confirm which of these products may have already been transitioned to an alternative rate.
- Confirm which have been transitioned to an interim rate, mainly synthetic LIBOR, and whether they now require additional action.
For USD LIBOR products
- Identify which products they use that reference LIBOR;
- Identify what amount of exposure these products have to LIBOR, including which mature after the end of June 2023;
- Examine and, if necessary, amend existing products to ensure there is robust language in place that sets out the steps to be taken, or the interest rate to be applied, in case LIBOR is no longer available (note the process for amending a particular financial product will depend on its terms and may require a consent process);
- Ensure appropriate documentation is in place to adequately disclose or mitigate risks associated with the discontinuation of LIBOR;
- For new products, confirm that they align with guidance on the use of USD LIBOR post 31 December 2021.
- Produce an inventory of relevant systems used (e.g. trade booking, risk systems) that may be affected should LIBOR no longer be published in the future, and consider making changes that will allow those systems to use alternative rates.
We encourage Market Participants to stay up-to-date on the latest developments and to consider how these changes may impact their organisation and the products in which they transact, using independent professional advisors (legal, accounting, financial, tax or other) as appropriate.
This is not intended to be an exhaustive list but instead, some initial steps market participants may want to consider as a starting point. Further information is available from the PRA/ FCA’s Dear CEO letter sent to supervised entities in March 2021, which set out that all firms meet the milestones of the Working Group on Sterling Risk-Free Reference Rates and the targets of other working groups and relevant supervisory authorities, as appropriate.
Frequently asked questions (FAQs)
These FAQs explore the background to this journey and discuss the new rates in greater detail.
Useful External Resources
ISDA: Fallback Consultations
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