Disclosures for Benchmark Reform

Globally, financial benchmarks are being reformed. In many jurisdictions, Risk-Free Rates (RFRs) are expected to eventually replace certain Interbank Offered Rates (IBORs) —including the London Interbank Offered Rate (LIBOR). In other jurisdictions, IBORs are being reformed and will continue to exist — albeit in an altered format.

It's important that you consider how benchmark reforms could impact any products you hold, may acquire, or any transactions that you have or may enter into with us (or any of our group companies) where such a product or transaction references an impacted IBOR.

Impacted IBORs may be subject to methodological or other changes, which could modify the value of the IBOR. In some instances, they could cease to exist (as is expected in the event of the LIBOR). In other cases, the IBORs may not be reformed enough — meaning they can no longer be used in certain jurisdictions (for example under the European Union Benchmark Regulation).

These consequences will impact products and transactions that you may hold or enter with us or any of our group companies.

In addition to the general disclosure above, please consider the following specific disclosures.

This does not constitute as legal advice relating to the use, change or reform of an IBOR. You should conduct your own investigations to ensure you understand the IBORs referenced in any product or transaction that you may use, the reforms, and the consequences thereof.

You should also consider that the replacement of an IBOR (or potentially the change of value in an IBOR) in any product or transaction may also carry tax, accounting and regulatory risks.

We encourage you to seek independent expert advice, which may include legal, financial, tax, accounting or regulatory guidance.

Derivatives

The International Swaps and Derivatives Association (ISDA) will publish benchmark fallbacks that apply in the event of a benchmark ceasing or no longer being available (including LIBOR).

The ISDA will do this by publishing a supplement to the 2006 ISDA definitions, which will update the relevant definitions to include the new fallback language.

The updated 2006 ISDA definitions will apply to all new trades entered into after the effective date of the supplement to the existing 2006 ISDA definitions.

At the same time, the ISDA is expected to publish a protocol, where parties could agree to include the new fallbacks into certain IBOR legacy trades in existence before the effective date of the protocol.

If you enter into a derivative, which references an impacted IBOR (especially a derivative that references LIBOR and that has an expiry date after December 2021), the transaction may need to be adjusted to include a new benchmark.

It is not yet clear how these changes will affect your derivative, and this may impact the value, cost and/or the transaction’s performance.

You should carefully consider the contents of ISDA’s IBOR Alternative Reference Rates Disclosure (PDF, 73KB) and each risk set out therein.

Floating Rate Notes (FRNs)

There is uncertainty as to how the industry will transition legacy FRNs that reference an impacted IBOR to a new rate.

If not transitioned, it is likely that the FRN will fall back to the last available interest rate and will be fixed at that rate for the duration of the FRN. Where the FRN transitions to a new rate, it’s likely that the methodology of the new rate will differ from the impacted IBOR — this may result in unpredictable and material consequences for you.

If you purchase FRNs with coupon payments calculated from an impacted benchmark (especially the LIBOR and your FRN has an expiry date after December 2021), then you should review the product disclosure information to understand how the issuer proposes to manage the transition and that you understand the fallback language included in the documents.

You should also consider any mismatch there may be with the IBOR fallback provisions in the FRN vs the IBOR fallback provisions in any related hedge arrangements you've entered into. If there’s a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.

Ensure that you're familiar with the provisions of any loan agreement that you have with us — including the interest rate fallback provisions or any replacement of screen rate clause that may appear therein.

The existing interest rate fallback provisions in loans were generally not designed to deal with a permanent benchmark cessation, as opposed to a benchmark’s temporary cessation.

The interest rate fallback provisions in your loan document, therefore, may not be robust enough to survive a permanent cessation. This could see the benchmark fall back to a rate that you didn't envisage at the time you entered into the loan, or it could go to a rate that is materially different to the current rate of the loan.

In loans, the ultimate fallback rate, is often what is known as the lender's cost of funds.

A loan agreement may also include provisions to replace the benchmark in certain instances. The Loan Market Association (LMA), as well as the Asia Pacific Loan Market Association (APLMA), have published what is known as a 'Replacement of Screen Rate clause'. This clause permits flexibility in the choice of a replacement benchmark upon certain trigger events and specifies which consent level will be required from the majority lenders.

To date, the interest on loans are based on term rates and calculated in arrears, and it’s not clear whether forward-looking benchmarks will be developed for these products and even if they are if they will be ready for use before the cessation of LIBOR particularly.

This means that the benchmark which your loan references may be replaced with a backwards-looking RFR.

The LMA has published a consultation paper setting out the structuring issues to consider when basing a loan on a backwards-looking RFR. You should consider the issues raised in this LMA consultation paper.

You should also consider any mismatch there may be with the IBOR fallback provisions in your loan agreement vs the IBOR fallback provisions in any related hedge arrangements you've entered into. If there’s a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.