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.

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.

Product disclosures

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

Derivatives and Floating Rate Notes

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 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', which has also recently been updated. 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 an exposure draft multicurrency agreement incorporating rate switch provisions, which aims to facilitate conversion from LIBOR before end-2021 through pre-agreed conversion terms.

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, whether 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 or when including the pre-agreed conversion terms. You should consider the issues raised in these LMA consultation papers.

You should also consider any mismatch there may be with the IBOR fallback provisions in your loan agreement 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.

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.

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, 669KB)

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.

Visit the Australian Government’s Australian Accounting Standards Board for the latest on accounting requirements to provide relief from the potential effects of the uncertainty caused by the interest rate benchmark reform.

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.