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 and consumer lending products.
Concern from global regulators about the robustness of benchmark interest rates such as the London Interbank Offered Rate (LIBOR) has led to wide ranging reforms. Most LIBOR settings ceased to be published or became unrepresentative at the end of 2021, while US dollar LIBOR became unrepresentative at the end of June 2023.
LIBOR Cessation Update
US dollar LIBOR ceased to be published or representative for overnight, 1-month, 3-month, 6-month and 12-month US dollar LIBOR settings on 30 June 2023.
US dollar synthetic LIBOR
On 23 November 2022, the Financial Conduct Authority (FCA) announced that the publication of the 3-month synthetic sterling LIBOR setting will permanently cease at end-March 2024.
Following two public consultations, the Financial Conduct Authority (FCA) announced on 03 April 2023 that synthetic USD LIBOR had been confirmed as available for use in certain legacy contracts. It is now available in 1-, 3- and 6-month settings and will cease at end-September 2024. The FCA requires ICE Benchmark Administration Ltd (IBA) to calculate the 1-, 3- and 6-month synthetic USD LIBOR settings using the relevant CME Term SOFR Reference Rate plus the appropriate ISDA fixed spread adjustment. As with previous rates, synthetic USD LIBOR is not intended for use in new contracts and is no longer representative for the purposes of the Benchmarks Regulation (BMR).
The FCA has reiterated that synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates and not a permanent solution; this heightens the importance of active transition.
Please be aware that the US Adjustable Interest Rate (LIBOR) Act (AIRLA), if applicable, supersedes the use of synthetic US dollar LIBOR as a transition methodology (see 16 December 2022 update, below).
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Overview
US dollar LIBOR ceased to be published or representative for overnight, 1-month, 3-month, 6-month and 12-month US dollar LIBOR settings on 30 June 2023.
Adherence to the International Swaps and Derivatives Association, Inc. (“ISDA”) 2021 Fallbacks Protocol and ICE Swap Rate fallbacks
The ISDA 2021 Fallbacks Protocol is a modular protocol which allows parties to amend ISDA’s standard definitions for interest rate derivatives to incorporate robust fallbacks for derivatives linked to certain benchmarks.
The USD LIBOR ICE Swap Rate (ISR) published by ICE Benchmark Administration (IBA), formerly known as ISDAFIX and sometimes referred to as the CMS (constant maturity swap) rate, is expected to cease publication simultaneously with USD LIBOR after June 30, 2023.
The Alternative Reference Rates Committee (ARRC) previously published recommendations for contracts linked to the USD LIBOR ISR in order to ensure that market participants take proactive steps to address the impact of the cessation of the USD LIBOR ISR on their legacy positions.
On June 15, 2022, ISDA published the June 2022 Benchmark Module of the ISDA 2021 Fallbacks Protocol, which Barclays has since adhered to. The module allows adhering parties to amend legacy USD LIBOR ISR derivative transactions to include robust fallbacks based on the new spread-adjusted SOFR-based swap rate.
ISDA also published a standalone Form of Agreement for adoption of fallback provisions in legacy USD LIBOR ISR derivatives transactions which incorporate either the 2000 ISDA Definitions, the 2006 ISDA Definitions or the 2021 ISDA Interest Rate Derivatives Definitions, or confirmations referencing the “USD LIBOR ICE Swap Rate.”
ISDA prepared a list of FAQs on the June 2022 Benchmark Module.
For more information on fallbacks for USD LIBOR ICE Swap Rate, please refer to ISDA’s ICE swap Rate FAQs.
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Mexican 91 and 182-day Interbank Equilibrium Interest Rate (TIIE)
On 20 December 2022, the Banco de México announced that that there will be a prohibition on the use of the 91 and 182-day TIIE rate for new contracts entered into from 1 January, 2024, with no exceptions.
Banco de México strongly encourages all Market participants to use the Overnight TIIE Funding Rate (also known as the TIIE de Fondeo or “F-TIIE”) as a reference rate for new contracts going forward.
Contracts linked to 91 and 182-day tenor TIIEs that are entered into until 1 January 2024 can remain with the understanding that the Banco de México will modify the methodology used for the calculation of these tenors. The change in calculation methodology will be made with the purpose of ensuring that legally binding contracts referenced to TIIE with 91 and 182-day tenor that are still active on 1 January 2024 do not require any adjustment through any legal amendment. Such new methodology will consider the Overnight TIIE Funding Rate of the day prior to the reference day being determined, compounded by the number of days of the corresponding term, plus a historical spread adjustment. Further details on these changes are contained in Banco de México Circulars 3/2012 and 14/2007, published on the Banco de México's public consultations website (available only in Spanish).
Singapore Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR)
On 31 March, 2021, the Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), established by the Monetary Authority of Singapore (MAS), published a report on timelines around ceasing issuance of SOR and SIBOR-linked financial products. As a consequence, new SOR Loans have been prohibited since 30 April 2021, and new SIBOR Loans and Derivatives as well as new SOR Derivatives have been prohibited since 30 September 2021.
The guidance also outlined the following:
- SOR will be discontinued immediately after 30 June, 2023;
- 1-month and 3-month SIBOR will be discontinued immediately after 31 December, 2024;
A further publication issued by SC-STS on 18 July, 2022, finalising the key settings of the MAS-recommended rate, strongly urged banks to ensure reasonable efforts are made by 31 March, 2023 to either actively transition out of, or to insert appropriate contractual fallbacks into, all SOR contracts maturing after 30 June, 2023.
The Monetary Authority of Singapore (MAS) website provides further information on the cessation of SOR and SIBOR, and transition to SORA.
Thai Baht Interest Rate Fixing (THBFIX)
Ahead of the discontinuation of THBFIX on July 1, 2023, the Bank of Thailand (BOT) and the Steering Committee on Commercial Banks’ Preparedness for LIBOR Discontinuation (the Committee) have stressed that market participants should actively transition legacy contracts referencing THBFIX to other benchmarks. The recommended alternative reference rate is in the Thai Overnight Repurchase Rate (THOR).
In order to limit legacy THBFIX and to facilitate the transition to THOR, the Committee set a number of milestones for market participants and financial institutions to cease new issuance of TBHFIX contracts and to reduce legacy exposures referencing THBFIX.
Turkish Lira Reference Interest Rate (TRLIBOR)
On May 26, 2022 The Banks Association of Turkey announced that the Turkish Lira Interbank Offer Rate (TRLIBOR) would cease to be published after 30 June 2022, and the Turkish Lira Overnight Reference Rate (TLREF) would be used as the replacement rate.
The Banks Association of Turkey further clarified the spread calculation methodology on 28 June 2022.
Canadian Dollar Offered Rate (CDOR)
On May 16, 2022, the Canadian Alternative Reference Rate Working Group (CARR) made an announcement relating to the cessation of CDOR. The announcement supported the decision taken by Refinitiv Benchmark Services (UK) Limited (RBSL), to permanently cease the calculation and publication of all tenors of CDOR (1-,2-, 3- month) after the end of June 2024.
From July 1, 2023, new bilateral, cleared and exchange traded derivatives must reference agreed alternative RFRs such as the Canadian Overnight Repo Rate Average (CORRA) compounded in arrears. No new CDOR exposure should be booked except for limited exceptions. Those exceptions include:
- Derivatives that hedge or reduce CDOR exposures of derivatives or securities transacted before June 30, 2023 in loan agreements transacted through to June 28, 2024
- Loans that contain robust fallbacks to alternative rates upon cessation of CDOR
- From June 29, 2024, publication of all CDOR tenors will permanently cease. Any remaining exposure on CDOR will need to revert to an agreed fallback.
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Synthetic Japanese yen LIBOR
Please note that synthetic yen LIBOR settings permanently ceased at the end of 2022.
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 stressed that synthetic LIBOR is only permitted for use on legacy contracts, where all other methods of transition have been exhausted and that market participants must continue to actively transition their contracts away from LIBOR wherever possible, notwithstanding the publication of synthetic rates.
Following its 30 June 2022 consultation on the wind down of synthetic sterling LIBOR and US dollar LIBOR, the FCA reminded market participants that all synthetic yen LIBOR settings would permanently cease after end-2022.
Background
The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks (JPY RFRWG) published their roadmap in early 2021, expecting that by 30 September 2021, market participants would have significantly reduced Japanese yen LIBOR linked cash product (bonds and loans) exposures, and ceased initiation of new Japanese yen LIBOR Interest Rate Swaps (IRS) maturing beyond end 2021, adopting alternative reference rates for Japanese yen LIBOR, with the exception of risk management purposes.
The JPY RFWG, part of the Bank of Japan (BoJ), released an announcement in late July 2021 on the Tokyo Overnight Average Rate (TONA) First go-live dates and scope of products. It recommended that JPY IRS linear products, carried out in the interbank market via voice brokers, should be ceased altogether after 30 July, 2021.
On 10 December 2021, Refinitiv, the Tokyo Swap Rate (TSR) administrator, announced the future permanent cessation of the TSR after the end of 2021. The International Swaps and Derivatives Association (ISDA) later published guidance for parties to over-the-counter derivative transactions that were affected by the announcement.
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Synthetic Sterling LIBOR
In order to ensure an orderly wind down of legacy LIBOR contracts, on 29 September 2021, the 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 stressed that synthetic LIBOR is only permitted for use on legacy contracts, where all other methods of transition have been exhausted and that market participants must continue to actively transition their contracts away from LIBOR wherever possible, notwithstanding the publication of synthetic rates.
Following its 30 June 2022 consultation on the wind down of synthetic sterling LIBOR and US dollar LIBOR, the FCA confirmed on 29 September 2022 that the publication of 1-month and 6-month synthetic sterling LIBOR will permanently cease after end-March 2023. The FCA also reminded market participants that all synthetic yen LIBOR settings will permanently cease after end-2022.
On 23 November 2022, the Financial Conduct Authority (FCA) announced that the publication of the 3-month synthetic sterling LIBOR setting will permanently cease at end-March 2024. The FCA has reiterated that any synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates, and not a permanent solution; this heightens the importance of active transition.
Background
The Working Group on Sterling Risk-Free Reference Rates (UK RFRWG) had previously recommended that by 30 September 2021, all legacy sterling LIBOR contracts 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 sterling LIBOR-linked linear derivative contracts expiring after end 2021. These circumstances generally pertained to risk management of existing positions and were listed in the RFRWG's publication. Exceptions were expected to be kept to a prudent minimum.
The UK RFRWG published a statement in December 2021, encouraging continued focus ahead of the cessation of most LIBOR panels, including sterling LIBOR at end-2021.
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€STR First
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.
Background
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.
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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.
Background
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.
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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.
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A summary of 2023 Central Counterparty Clearing Houses Conversions - CME, LCH, EUREX and HKEX
As part of industry-wide Benchmark Reform efforts, CCPs worked to transition all LIBOR-linked USD cleared trades by the end-June 2023. This followed the transition events which took place for JPY/GBP/CHF/EUR LIBOR before the end of 2021.
LCH events:
Tranche 1 USD Swap Conversion
USD LIBOR / FEDFUNDS Basis Swaps, USD Variable Notional Swaps and USD Zero Coupon Swaps
22 April 2023
Tranche 2 USD Swap Conversion
All other products not included in Tranche 1
20 May 2023
Further information on LCH can be found here
CME events:
Basis Swap Splitting
24 March 2023
Primary USD Swap Conversion
All USD LIBOR products excluding Zero Coupon Swaps
21 April 2023
Secondary USD Swap Conversion
Zero Coupon Swaps and remaining USD LIBOR swaps
03 July 2023
Further information on CME can be found here
EUREX event:
Eurex OTC Clear trades
21 April 2023
Further information on EUREX can be found here
HKEx event:
Single Currency Interest Rate Swaps & Cross Currency Swaps Conversion
20 May 2023
Further information on HKEx can be found here
Further information on these events will be provided here ahead of these conversion dates.
Background, approach and how to prepare
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Background
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 across many jurisdictions, including 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 (FSB), 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 FSB 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?
The London Interbank Offered Rate (LIBOR) ceased at the end of 2021 for the majority of settings and currencies it represented. US dollar LIBOR settings remained published and representative until end-June 2023.LIBOR was a daily benchmark interest rate calculated as an average of panel bank submissions, which provided an indication of the rate that banks paid to borrow unsecured money. It was 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. Its administrator, ICE Benchmark Administration (IBA), published LIBOR rates every applicable London business day.
Before end-2021, LIBOR was calculated across five currencies (Pound sterling, euro, Japanese yen, Swiss franc and US dollar) and seven tenors (overnight, 1 week, 1, 2, 3, 6 and 12 months).
The overnight, 1-month, 3-month, 6-month and 12-month US dollar LIBOR settings continued under a panel bank methodology until end-June 2023. See US dollar LIBOR section for information on limited uses of Synthetic US dollar LIBOR.
See Timeline menu above for key industry comments on LIBOR transition.
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Alternative rates
Global regulators formed currency-specific working groups to assess market conditions, examine alternatives and consider next steps. Members of these working groups included banks, asset managers, insurance companies, and corporates. Industry bodies and trade associations representing various segments of the market were 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 be the most popular 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.
Some examples are noted below:
Currency
Original Rate
Alternative Rate
Transaction Type
CAD CDOR CORRA, Canadian Overnight Repo Rate Average Secured RBL MOSPrime RUONIA, Ruble Overnight Index Average Unsecured SGD SIBOR SORA, Singapore Overnight Rate Average Unsecured THB THBFIX THOR, Thai Overnight Repurchase Rate Secured 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
What are RFRs?
The acronym “RFR” was introduced by the Financial Stability Board (FSB) in its 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 the relevant IBOR.
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;
- RFR based term rates have been developed across all but one of the major currencies, in order to know the applicable interest rate in advance of any payments to be made. 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 the relevant IBOR
- Whilst all the relevant IBORs 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.
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Risks to consider
The path to transition away from the relevant IBOR is complex. The alternative reference rates are calculated on a different basis to the relevant IBOR. 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 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 the relevant IBOR
- 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 the relevant IBOR falls due to a decrease in the number of the relevant IBOR-referencing underlying transactions, the relevant IBOR and the relevant IBOR-referencing products and transactions may become more volatile
- Alternative reference rates may be materially different from the relevant IBOR 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 the relevant IBOR 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 the relevant IBOR-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 the relevant IBOR reform, any exposure they may have to the relevant IBOR 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 the relevant IBOR 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.
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What we are doing
- Barclays continues to support the benchmark interest rate reform agenda as set out by the Financial Stability Board (FSB) 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 the relevant IBOR transition.
- 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 Risk Free Rates (RFRs) is at different stages depending on the jurisdiction, and moving at different speeds. This also applies to any further development of RFR-based term rates.
- We are in regular contact with clients of Corporate and Investment Bank and Private Bank in order to highlight some of the risks market participants should consider and suggest what steps could be taken to prepare for the relevant IBOR 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.
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How to prepare
Given the use of US dollar 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. This may be achieved by taking some initial steps, including (though not necessarily limited to):
- Identify which products they use that reference LIBOR and which setting of the relevant IBOR is used;
- Identify what amount of exposure these products have to the relevant IBOR, including those which mature after the IBOR cessation date;
- 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 the relevant IBOR 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 the relevant IBOR;
- For new products, confirm that they align with guidance on the use of the relevant IBOR
- Produce an inventory of relevant systems used (e.g. trade booking, risk systems) that may be affected should the relevant IBOR 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.
Frequently asked questions (FAQs)
These FAQs explore the background to this journey and discuss the new rates in greater detail.
Useful External Resources
USD: Alternative Reference Rates Committee
JPY: Bank of Japan - Benchmark Interest Rate Reform
SGP: ABS - Association of Banks in Singapore
GBP: Working group on Sterling Risk-Free Reference Rates
EUR: Working Group on Euro Risk-Free Rates
CHF: National Working Group on Swiss Franc Reference Rates
THB: Bank of Thailand – LIBOR Thai Reference Rate and LIBOR Transition
INR: Reserve Bank of India - MIFOR
ISDA: Fallback Consultations
FSB: Overnight Risk-Free Rates - A User Guide
Disclaimer
This information:
(i) Has been prepared by Barclays Bank PLC and its affiliates (“Barclays”) and is provided for information purposes only and is subject to change. It is indicative only and not binding.
(ii) Is not research nor a product of the Barclays Research department. Any views expressed in this communication may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of this communication and are subject to change. Barclays is not obliged to inform recipients of this communication of any change to such opinions or estimates.
(iii) Is general in nature and does not take into account any specific investment objectives, financial situation or particular needs of any particular person.
(iv) Does not constitute an offer, an invitation or a recommendation to enter into any product or service and does not constitute investment advice, solicitation to buy or sell securities and/or a personal recommendation. Any entry into any product or service requires Barclays’ subsequent formal agreement which will be subject to internal approvals and execution of binding documents.
(v) Is for the benefit of the recipient. No part of it may be reproduced, distributed or transmitted without the prior written permission of Barclays.
(vi) Has not been reviewed or approved by any regulatory authority.
Barclays is a full service bank. In the normal course of offering products and services, Barclays may act in several capacities and simultaneously, giving rise to potential conflicts of interest which may impact the performance of the products.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
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