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Preparing for Interbank Offered Rate (IBOR) Transition

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).

Background, approach and how to prepare

  • 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.

    1. Strengthen existing Interbank Offered Rates (IBORs) by underpinning them to the greatest extent possible with transactions data
    2. 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.

  • 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.
  • 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.

  • 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.
  • 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.

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.

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(vi) Has not been reviewed or approved by any regulatory authority.

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