FINANCIAL BENCHMARK REFORM - WHAT’S CHANGING

Globally, financial benchmarks are being reformed. In many jurisdictions, Risk-Free Rates (RFRs) are replacing certain Interbank Offered Rates (IBORs) — including the London Interbank Offered Rate (LIBOR). In other jurisdictions, reformed IBORs continue to exist alongside the new RFRs.

On 5 March 2021 various industry and regulatory bodies made key statements on the future cessation of certain IBORs. In particular, the UK Financial Conduct Authority (FCA) noted that all 35 LIBOR tenors would either permanently cease, or continue in an unrepresentative manner. These changes will occur on the following dates:

31 December 2021

  • All GBP, EUR, CHF and JPY LIBOR settings
  • USD LIBOR one week and two month settings

30 June 2023

  • USD LIBOR overnight and one, three, six and 12 month settings

The FCA also noted that the one, three and six month LIBOR settings would continue for GBP and JPY and after these dates for a limited time on a synthetic basis and will only be permitted for use in legacy contracts (no new contracts) other than cleared derivatives.

For the USD LIBOR settings continuing until 30 June 2023, the FCA proposes to prohibit the new use of these LIBOR settings from the end of 2021.

It's important that you consider how benchmark reforms, synthetic rates and restrictions imposed by the FCA could impact any products you hold or may acquire, as well as 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 (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 into with us or any of our group companies.

Product disclosures

In addition to the information and general disclosure above, please consider the following specific disclosures:

  • Derivatives disclosure
  • Floating Rate Notes (FRNs) disclosure

Loans disclosure

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 anticipate 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. The LMA has also published a multicurrency agreement incorporating rate switch provisions, which aims to facilitate conversion from LIBOR through pre-agreed conversion terms. The APLMA has also published an Australian version of the rate switch agreement.

Whether and when your loan agreement will fall back to an agreed fallback or a synthetic LIBOR depends on the fallbacks included in your loan agreement and whether it includes fallback triggers when LIBOR ceases permanently or prior to that when LIBOR becomes unrepresentative.

To date, the interest on loans are based on term rates and calculated in arrears. RFRs are backwards-looking meaning that the benchmark which your loan references may be replaced with a backwards-looking rate.

The LMA has published a consultation paper setting out the structuring issues to consider when basing a loan on a backwards-looking RFR or when including the pre-agreed conversion terms. You should consider the issues raised in these LMA consultation papers.

Certain forward-looking term RFRs have been developed and may be suitable for use in your loan agreement.

You should also consider any mismatch there may be with the IBOR fallback provisions in your loan agreement or any new rate which you transition to versus 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.

Important information

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.

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.

Working with you through the transition

We are committed to working with you throughout the transition to risk-free rates (RFR) by listening to your needs and providing insights into industry developments. You should seek your own independent advice before making any decisions in respect of the transition.

IBOR Fallbacks Supplement (PDF, 875KB).

IBOR Fallbacks Protocol PDF, 670KB).

ISDA – Understanding IBOR Benchmark Fallbacks (PDF, 104KB).

See the latest articles about LIBOR reform from the UK’s regulator, the Financial Conduct Authority (FCA).

Learn how the Bank of England is working with market participants to transition to SONIA as the primary interest rate benchmark in pound sterling.

Read this speech about interest rate benchmark reform for the Australian dollar given by the deputy governor of the Reserve Bank of Australia.

Visit the European Securities and Markets Authority for information on the benchmark regulations in the European union.

Visit the industry-leading International Swaps and Derivatives Association (ISDA) to see their latest developments on robust contractual fallbacks for derivatives.

Read about the Alternative Reference Rates Committee, a group of private-market participants who are helping ensure a successful transition from USD LIBOR to a more robust reference rate, the Secured Overnight Financing Rate.

Visit the Loan Markets Association for the latest updates regarding their work on the transition for loans with the market, regulators and other trade associations.

Contact us

If you have any questions about the transition to the alternative reference rates, please contact your relationship manager.

We also have a dedicated Financial Benchmarks Reform team, please feel free to email us.