The latest updates
Globally, financial benchmarks are undergoing reform. In many jurisdictions, Risk-Free Rates (RFRs) have replaced certain Interbank Offered Rates (IBORs) — including the London Interbank Offered Rate (LIBOR). In other jurisdictions, reformed IBORs continue to exist alongside the new RFRs.
- From 1 July 2023 all LIBOR panels have now ended, and most of their settings ceased or become permanently unrepresentative.
- Also from 1 July 2023, the Financial Conduct Authority (FCA) as regulator for LIBOR announced that the 1, 3 and 6-month USD LIBOR settings, opens in new window will continue to be published on a synthetic basis. These rates are unrepresentative and not for use in new transactions. The publication of these synthetic rates is expected to cease end-September 2024. In making this announcement, the FCA was clear that these settings are a temporary bridge for contracts that still need to be transitioned off LIBOR.
- Some other IBORs have also ceased or have announced cessation, including:
- Ceased: Singapore Swap Offer Rate (SOR) replaced with Singapore Overnight Rate Average (SORA)
- Upcoming cessation: Canadian Dollar Offered Rate (CDOR) to be replaced by Canadian Overnight Repo Rate Average (CORRA).
- The Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) have stated that BBSW remains a robust benchmark, and hence there are no current plans to discontinue its use. Including appropriate fallbacks will nevertheless provide legal certainty and economic clarity.
Ongoing Benchmark Reform
Notwithstanding the successful completion of the complex transition off LIBOR, benchmark reform will continue across global jurisdictions.
Some jurisdictions have announced the cessation dates for their key benchmark:
- Canada has announced, as published in the REFINITIVE Benchmark Services (UK) Limited report, opens in new window (PDF, 126KB), that its key IBOR, Canadian Dollar Offered Rate (CDOR), will cease after 28 July 2024 and is to be replaced by Canadian Overnight Repo Rate Average (CORRA).
- The Monetary Authority of Singapore, opens in new window has announced that the Singapore Interbank Offered Rate (SIBOR) will cease immediately after 31 December 2024 and be replaced by SORA.
Other jurisdictions have begun consultations on the future of their IBOR rates:
- In New Zealand, submissions have recently closed on a consultation on the future of the Bank Bill Benchmark rate (BKBM), published in Consultation One: Viable Replacement Options, opens in new window (PDF, 767KB), undertaken by the New Zealand Financial Benchmark Facility (NZFBF).
- In Japan, JBATA have also initiated a consultation on the future of euroYEN Tokyo InterBank Offered Rate, opens in new window (TIBOR), with results expected to be published by 31 March 2024.
BBSW remains a robust benchmark, and Australian financial regulators have been working closely with the ASX and market participants to ensure that BBSW remains robust.
Product specific considerations
In addition to the information above, please consider the implications for the following products:
The International Swaps and Derivatives Association, Inc (ISDA) has published benchmark fallbacks that apply to derivative transactions in the event of a benchmark ceasing or no longer being available.
- 2006 ISDA Definitions: ISDA has published supplements to the 2006 ISDA definitions, which update the relevant definitions to include the new fallback language and new floating rate options. The updated 2006 ISDA definitions apply to all new trades entered into after 25 January 2021, unless parties agree otherwise.
- 2021 ISDA Interest Rate Definitions: The 2021 ISDA Interest Rate Derivatives Definitions contain the fallbacks and new floating rate options. These definitions will apply to a transaction where parties agree that the transaction is subject to this version of the definitions.
- ISDA 2020 IBOR Fallbacks Protocol: ISDA also published the 2020 IBOR Fallbacks Protocol, opens in new window 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 under this protocol, and this should be taken into account when you consider your adherence to this protocol.
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, opens in new window and each risk set out therein.
2. Floating Rate Notes (FRNs)
If a FRN referencing an impacted IBOR does not contain robust fallback language in its documentation 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 is likely that the methodology of the new rate will differ from the impacted IBOR, and this may result in unpredictable and material consequences for you.
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 is a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.
3. Finance agreements
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.
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. 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 interest rate.
Generally, if your interest is currently calculated using an interest rate that is to be discontinued, it is sensible for all parties to agree amendments to ensure finance agreements transition to new replacement RFRs on or prior to discontinuance.
Some more recent finance agreements have included a ‘Replacement of Screen Rate’ clause or ‘Rate Switch’ provisions to facilitate transition to RFRs that may partly or fully set out how transition to a RFR will occur.
Traditionally with IBORs, the amount of interest payable for an interest period is calculated based on a forward-looking rate at the start of an interest period. Subject to exceptions mentioned below, RFRs are backward-looking. Importantly, this means that (unlike the situation with existing IBOR rates) the exact amount of interest a borrower will pay for an interest period is not known at the start of the interest period; rather, it’s calculated by the Bank and notified to the borrower shortly before the end of the relevant interest period. This is referred to as a ‘compounding in arrears’ methodology.
Certain forward-looking term RFRs have been developed and may be suitable for use in your finance agreement. If these rates can be used, interest rates are set at the start of an interest period (in a similar manner to existing IBOR based finance agreements). At the time of writing a forward-looking RFR based interest rate (‘Term SOFR’) is available for US dollar cash products.
You should also consider any mismatch there may be with the interest rate fallback provisions in your finance agreement versus the fallback provisions in any related hedge arrangements you have entered into. If there is a material interest rate mismatch, it may result in basis risk or undermine the effectiveness of the hedge.
Working with you through the transition
We are committed to working with you throughout the transition to RFRs 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.
Useful links about financial benchmark reform
- Visit the ISDA Benchmark Reform and Transition from LIBOR InfoHub – International Swaps and Derivatives Association, opens in new window to see their latest developments on robust contractual fallbacks for derivatives.
- ISDA – Understanding IBOR Benchmark Fallbacks (PDF, 104KB) , opens in new window.
- Interest Rate Benchmark Reform in Australia: Market Operations Resources – Interest Rate Benchmark Reform in Australia | RBA, opens in new window
- ISDA IBOR Fallbacks Supplement (PDF, 875KB), opens in new window.
- ISDA 2020 IBOR Fallbacks Protocol (PDF, 670KB)., opens in new window
- Visit the European Securities and Markets Authority, opens in new window for information on the benchmark regulations in the European union.
- Visit the Loan Market Association, opens in new window for the latest updates regarding their work on the transition for loans with the market, regulators and other trade associations.
If you have any questions about the transition to the alternative reference rates, please contact your relationship manager.
Reach out to our dedicated Financial Benchmarks Reform team, opens in new window if you require any additional information.
Terms and Conditions
Apologies but the Important Information section you are trying to view is not displaying properly at the moment. Please refresh the page or try again later.
This does not constitute 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.