Replacing LIBOR: an overview - March 2019 - Association of Corporate ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Replacing LIBOR: an overview
March 2019The LIBOR interest benchmark is “The absence of active underlying
markets raises a serious question
changing. This is an introduction to about the sustainability of the LIBOR
benchmarks that are based upon
the key changes and how they may these markets… the planning and
affect you and your business. the transition must now begin.”
Andrew Bailey, Chief Executive Officer, FCA
What is LIBOR? What’s changing and why
The London Interbank Offered Rate (LIBOR) is one of a number of Interbank Since 2013 International regulators began focussing on IBOR reform.
Offered Rates (IBORs) that are widely used in the global financial markets.
With the number of interbank unsecured borrowing
It’s used as a key interest rate benchmark across a number of derivatives, transactions reducing in recent years, there has been an
bonds, loans, securitisations, deposits and other products, as well as for increasing reliance on the expert judgement of panel banks on
banks’ and other financial institutions’ own funding and capital needs. which to base LIBOR. This has led to concerns that LIBOR is no
longer a representative or reliable benchmark reference rate.
LIBOR is calculated and published daily across five currencies (GBP, USD,
EUR, JPY and CHF) and seven maturities (overnight, one week, and 1, 2, 3, July 2017 Andrew Bailey, Chief Executive Officer of the Financial
6 and 12 months) by the Intercontinental Exchange Benchmark Conduct Authority (FCA) announced that the FCA would
Administrator (ICE BA). not persuade or compel LIBOR panel banks to make LIBOR
submissions beyond the end of 2021.
It’s based on submissions by a panel of banks using available transaction data
and their expert judgement. July 2018 The FCA and US Commodity Futures Trading Commission
(CFTC), among other regulators and industry groups, told
LIBOR should provide an indication of the average rate at which each the global market they need to accelerate efforts to stop
LIBOR contributor can borrow unsecured funds in the London interbank using products that reference LIBOR, and transition to
market for a given period, in a given currency. This average is published alternate Risk-Free Rates (RFRs).
and used by the financial markets.
2 | Replacing LIBOR: an overviewThere are a number of Risk-Free Rates
being considered
Working Groups have been set up to select alternative
RFRs across all major currencies.
The Bank of England’s Working Group on Sterling
SONIA Summary of IBOR replacement rates
Risk-Free Reference Rates has recommended Currency Alternative Working group Nature
LIBOR is a forward-looking term
using the Sterling Overnight Indexed Average rate rate
rate. However SONIA is a backward-
(SONIA) as its preferred option. This reference
looking, overnight rate based on actual SOFR1 Alternative Reference Rates Overnight,
rate is already widely used in the derivatives Committee (ARRC) Secured
transactions that have taken place
markets with a growing number of Bonds
the day before. Reformed Working Group on Sterling Overnight,
using it as well. The requirement for a Term
SONIA Risk-Free Rates Unsecured
SONIA Reference Rate (TSRR) is actively being Recognising that certain markets, for
considered by the industry in conjunction with SARON2 National Working Group on Overnight,
example cash and lending, may prefer
Swiss Franc Reference Rates Secured
the Bank of England and the FCA. forward-looking term characteristics, the
Bank of England has gathered market TONAR3 Study Group on Risk-Free Overnight,
In the US the Alternative Reference Rate Reference Rates Unsecured
views on a forward-looking Term SONIA
Committee (ARRC) has recommended the
Reference Rate (TSRR). A decision should ESTER4 Working Group on Euro Overnight,
Secured Overnight Financing Rate (SOFR). Risk-Free Rates Unsecured
be made later this year.
The requirement for a Term SOFR is also being
considered by the industry and the ARRC. A summary of responses to the
1. Secured Overnight Financing Rate;
consultation can be found at
The European Central Bank (ECB) has 2. Swiss Average Rate Overnight;
www.bankofengland.co.uk *
recommended that the Euro Short Term Rate 3. Tokyo Overnight Average Rate;
(ESTER) replaces the Euro Overnight Indexed * Externally hosted website. 4. ESTER is the new wholesale unsecured overnight bank borrowing
National Westminster Bank Plc (NatWest) rate, which the ECB will produce before 2020.
Average rate (EONIA), which is currently not EU
is not responsible for the accuracy or
benchmark regulation compliant. ESTER is due content on this site.
to be published by the ECB from October 2019.
3 | Replacing LIBOR: an overviewWhat this means
for you
Existing contracts These changes may be relevant to some
Ahead of the likely discontinuation of products you have purchased or may be
LIBOR, market participants will need to thinking about purchasing.
think about the best way to review and
amend documentation, processes and
While the market for alternative RFRs is still developing, LIBOR
contractual agreements for any existing
continues to be a widely accepted benchmark in corporate
contracts that reference LIBOR and
and commercial loans and other financial products.
mature after 2021.
For new or existing products that may be affected, the global
financial markets are working together to agree how best
New contracts
to transition to the alternative RFRs by the end of 2021, or
New contracts that reference LIBOR will in some cases earlier.
need to consider whether fallback provisions
would be needed in the absence of a specific We’ll continue to speak to you as these plans develop and you
RFR being identified. Work is ongoing in the may also find it helpful to get in touch with your independent
market to determine the best way to do this professional advisers on what the transition may mean for
with minimal disruption. you and the products you hold.
4 | Replacing LIBOR: an overviewA few things to think about
Overnight rate versus a term rate Different product approaches Multi-currency products
• LIBOR is a term rate that includes an element of • The general market consensus is that it may be Replacement RFRs may change how a multi-currency
credit spread reflecting the borrowing risk in the sensible to include fallback provisions in contractual product operates, and again the market is working
interbank market. documentation (fallback provisions are already included together to find the best solution.
for derivatives products) in case an IBOR stops being
• A term rate provides borrowers with a known interest used before the relevant transition is completed.
rate for the period of borrowing and therefore the
amount of interest due at the end of the borrowing term, • This may take the form of a roadmap to determine
something that some borrowers may find helpful for a replacement rate or reference to a specific
cashflow forecast. replacement rate.
• An overnight rate, based on actual transactions • As the alternative RFRs market develops, it’s possible
and reset on a daily basis in arrears, removes any that differences could occur in relation to fallbacks for
expectation of future events inherent in a term rate. different products. These could be, for example, different
trigger events, timings, or even a different fallback rate.
• SONIA is likely to be a less volatile rate known only at the
end of the borrowing period and borrowers may favour
this rather than a more volatile term rate known at the
start of the borrowing period
• Development of a TSRR would provide borrowers with
a rate at the beginning of the borrowing period, similar
to LIBOR, although it wouldn’t include credit spread.
• Alternative term RFRs are also being considered in
the US and Europe that may operate in different
ways to a TSRR.
5 | Replacing LIBOR: an overviewWhat’s happening now? What happens next?
NatWest supports the market transition from We are waiting for the outcome of the Bank of England’s
LIBOR. We’re working closely with our regulators, consultation on a term SONIA to help guide the direction
market participants, industry bodies and trade of both existing LIBOR products and the development of
associations, to make sure the transition is as new products. This will shape many of our transition plans.
smooth as possible. We’ll be back in touch with you as these progress.
In the meantime, if you’d like to know more
please speak to your Relationship Manager
or usual contact within the bank.
Regulatory announcements
Co-ordinated UK and US
regulatory statements that LIBOR
discontinuation “is a certainty”
ESTER announced
SOFR data ECB proposes ESTER as
published in US replacement of EONIA
The planned replacement
SOFR activity
of USD LIBOR, Secured
Financial institutions
Overnight Financing Rate,
begin SOFR-linked issuance
did not exist historically EU Benchmark Regulation
in the US Drive to future state
Transition period ends, only EU
BoE publishes Reformed Development of the
SOFR swaps to be cleared Benchmark Regulation compliant
SONIA TSRR continues
on CME Benchmarks allowed in new
The Sterling Overnight Indexed
ESTER (EUR RFR) contracts
Average rate was chosen as BoE Term SONIA
Andrew Bailey publication starts
the preferred RFR to replace Working Group EONIA will no longer
announcement
GBP LIBOR Consultation paper issued. EURIBOR decision on EU be compliant
FCA announced that they will
Benchmark compliance
IBOR review not persuade or compel banks SONIA linked issuance Banks submit detailed RFRs in place
Bank of England (BoE) Working to submit the inputs used for First FRN issuance linked LIBOR transition plans Regulatory responses to Banks no longer compelled
Group on Sterling RFR founded LIBOR after 2021 to SONIA to FCA/PRA banks’ LIBOR transition plans to submit LIBOR
2015 2017 2018 H1 2018 H2 2019 2021
6 | Replacing LIBOR: an overviewImportant information This document has been prepared by National Westminster Bank Plc and its affiliates (together “NatWest”) for the intended (the “Recipient”). This document has been delivered to the Recipient for information purposes only. It does not constitute an offer or invitation for the sale, purchase, exchange or transfer of any investment, loan or asset and is not intended to form the basis of any decision or evaluation by the Recipient and should not be regarded as a recommendation by NatWest that the Recipient should participate in any transaction. The Recipient should seek its own financial and tax advice and perform its own independent investigation research and analysis, and shall rely solely on its own judgment, review and analysis to determine its interest in participating in any transaction. Nothing in this document should be construed as legal, tax, regulatory, valuation or accounting advice by NatWest for the Recipient; all of which the Recipient acknowledges that it should seek from its own advisers. The content of this document reflects prevailing conditions and NatWest’s views as at this date. NatWest reserves the right, but shall not be obliged, to revise, update or replace such content. NatWest has prepared this document based on information obtained from a number of different sources and assumed, without independent verification, the accuracy and completeness of all such information. No representation, warranty, undertaking or assurance of any kind, express or implied, is or will or has been authorised to be made as to the accuracy or completeness of the document. Without prejudice to the generality of the foregoing, nothing contained in this document is, or shall be, relied upon as a promise or representation as to the achievability or reasonableness of any future projections, estimates, prospects or returns contained herein (or in such other written or oral information provided to the Recipient). The issue of this document shall not be deemed to be any form of commitment on the part of NatWest to proceed with any transaction. NatWest shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in or omission from this document or in any other information or communications made in connection with the matters set out herein. NatWest accepts no liability for the actions of any third party referred to in this document. By accepting this document, the Recipient agrees to be bound by the foregoing limitations. The publication and distribution of this document may, in certain jurisdictions, be restricted by law. Recipients of this document should be aware of, and comply with, applicable legal requirements and restrictions. NatWest accepts no responsibility for any violation of any such restrictions. National Westminster Bank Plc. Registered in England No. 929027. Registered Office: 250 Bishopsgate, London EC2M 4AA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. March 2019
You can also read
