In addition to the information and general disclosure above, please consider the following specific disclosures:
- Derivatives disclosure
- Floating Rate Notes (FRNs) disclosure
- Finance disclosure
Derivatives disclosure
The International Swaps and Derivatives Association (ISDA) has published benchmark fallbacks that apply in the event of a benchmark ceasing or no longer being available.
ISDA has done this by publishing a supplement to the 2006 ISDA definitions, which updates the relevant definitions to include the new fallback language.
The updated 2006 ISDA definitions apply to all new trades entered into after 25 January 2021.
ISDA also published a protocol that parties can use to include the new fallbacks into certain IBOR legacy trades in existence before 25 January 2021. You can exclude certain legacy trades from your adherence and this should be accounted for when considering your adherence to the protocol.
If you entered into a derivative contract prior to 25 January 2021, which references an impacted USD LIBOR tenor (see above) that has an expiry date after June 2023 and have not yet adopted the protocol, the transaction will need to be amended to include a new benchmark or transitioned prior to end June 2023.
These changes will affect your derivative and may impact the value, cost or the performance of your derivative.
You should carefully consider the contents of Supplement to the “Plain English” Disclosures for Derivatives Referencing LIBOR and other IBORs and each risk set out therein.
Floating Rate Notes (FRNs) disclosure
If a FRN is 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. It is also possible that synthetic LIBOR may apply to GBP, CHF and JPY FRNs after 31 December 2021 in respect of those settings for which synthetic LIBOR will apply. 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 LIBOR and your FRN has an expiry date after December 2021 for GBP, CHF and JPY, and after June 2023 for USD), 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 versus the IBOR fallback provisions in any related hedge arrangements you have entered into. If there’s a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.
Finance disclosure
Ensure that you are familiar with the provisions of any finance 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 finance agreements 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 finance 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 finance agreement, or it could go to a rate that is materially different to the current rate of the finance.
In finance agreements, the ultimate fallback rate is often what is known as the financier’s cost of funds.
A finance 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 financiers. 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 finance agreement will fall back to an agreed fallback depends on the fallbacks included in your finance agreement and whether it includes fallback triggers when LIBOR ceases permanently or prior to that when LIBOR becomes unrepresentative.
To date, the interest on finance is based on term rates and calculated in arrears. RFRs are backwards-looking meaning that the benchmark which your finance 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 finance 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 finance agreement.
You should also consider any mismatch there may be with the IBOR fallback provisions in your finance agreement or any new rate which you transition to versus the IBOR fallback provisions in any related hedge arrangements you have entered into. If there’s a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.
