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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, with US dollar LIBOR expected to either cease to be provided by an administrator or no longer be representative after end-June 2023.

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 US dollar 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.

Barclays continues to expect that the timing of remaining transitions away from relevant interbank offered rates/ benchmarks will take into account a number of factors: 

  • regulatory requirements;
  • liquidity in the replacement Risk Free Rate (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 ‘synthetic’ LIBOR rates.

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 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.

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. However, most US dollar LIBOR settings remain published and representative until end-June 2023.

    LIBOR is a daily benchmark interest rate calculated as an average of panel bank submissions, which provides an indication of the rate that banks pay to borrow unsecured money. It is 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), publishes 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 are continuing under a panel bank methodology until end-June 2023.

    On 29 September 2022, the FCA announced the 1-month and 6-month sterling LIBOR and Japanese yen LIBOR will permanently cease after end-March 2023 and reminded market participants that all synthetic yen LIBOR settings will permanently cease after end-2022. Currently, the FCA is still assessing whether there is a requirement to continue the publication of US dollar LIBOR on a synthetic basis after 30 June 2023.

    Key industry comments around LIBOR transition are noted below:

    In a significant 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 [2021], 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.”

    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 confirmed that all LIBOR settings would 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).

    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  the importance of a smooth transition away from LIBOR.

    In a speech delivered to the Structured Finance Association on 5 October 2021, Vice Chair of the Federal Reserve, Randal Quarles, stressed that given there was now clarity on when and how LIBOR would come to an end, market participants should accelerate their transition away from LIBOR, and the Fed would supervise firms accordingly.

  • 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. 

    Currency

    Original 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

    What is happening with EONIA & EURIBOR?

    The Euro Short Term Rate (€STR) replaced the Euro Overnight Index Average (EONIA), at the end of 2021. The EURO Interbank Offered Rate (EURIBOR) methodology was reformed in Q4 2019 and no cessation date has yet been given for EURIBOR.

    However, the administrator of EURIBOR, the European Money Market Institute (EMMI) began consultations in August 2022 on their newly-developed Euro Forward Looking Term Rate (EFTERM), based primarily on €STR-linked OIS quotes as a fallback rate to EURIBOR. Further information will be provided here when it becomes available.

    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 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;
    • 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 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 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 LIBOR 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 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.
  • 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 LIBOR is used;
    • 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 US dollar LIBOR post 31 December 2021; and
    • 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. 

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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