The transition to risk-free rates (RFRs) continues across all LIBOR currencies and asset classes.
Regulators and industry working groups have emphasised that timely transition from LIBOR remains essential despite the disruptions resulting from COVID-19.
On 18th and 30th November, LIBOR administrator, ICE benchmark Administration made announcements that it will consult on its intention to cease the publication of GBP, EUR, CHF, JPY LIBOR in all tenors after 31 December 2021, and USD LIBOR in all tenors other than 1 week and 2 month, after 30 June 2023. We refer to the accompanying statement of the UK Financial Conduct Authority (FCA) for further background on the implications of these statements for the expected timeline of USD LIBOR in particular.
In October, the Financial Stability Board published its ‘Global Transition Roadmap for LIBOR’. In addition, industry working groups have published statements and timelines to facilitate the transition to RFRs, as further set out below The Loan Market Association (LMA), the Asia Pacific Loan Market Association (APLMA) and the Loan Syndications and Trading Association (LSTA) are developing conventions and standards for the adoption of RFRs.
Industry bodies have been working to develop further contractual clauses (‘fallbacks’) to address LIBOR’s discontinuance by referencing a specified RFR as an alternative rate in the event LIBOR and other key IBORS are discontinued permanently. Whilst it is anticipated that the fallbacks proposed by industry bodies are broadly similar across asset classes, there may be some differences. Therefore, a mismatch in replacement rates and interest calculations across products in your portfolio may arise.
On 23 October, The International Swaps and Derivatives Association (ISDA) published a statement from its Board of Directors announcing the launch of the IBOR Fallbacks Supplement (Supplement) and IBOR Fallbacks Protocol (Protocol), which will take effect on 25 January 2021.
From that date, these fallbacks will automatically apply to new derivatives trades referencing the 2006 ISDA Definitions. The Protocol enables market participants to choose to incorporate the fallbacks into their legacy non-cleared derivatives trades with counterparties that also opt to adhere to the Protocol1.
CommBank recognises that proper and robust fallbacks to LIBOR and other key IBORs play an important role in financial stability. CommBank is currently performing its due diligence with respect to the Protocol. You are encouraged to undertake your own due diligence and may wish to seek independent advice. Here's where you can track adherence to the Protocol, including CommBank’s possible adherence.
Market indicators suggest that liquidity and activity in RFRs is steadily increasing and we expect that to continue throughout 2021.
In July, major clearing houses LCH, CME and Eurex switched the interest rate on variation margin exchanged between clearing members and the clearing house from EONIA to €STR. In October, LCH and CME made a similar switch from Fed Funds to the Secured Overnight Financing Rate (SOFR) which resulted in an increase in SOFR trading activity.
Interest rate swap liquidity providers and interdealer brokers were encouraged by the Bank of England (BoE) and the FCA to use the Sterling Overnight Index Average (SONIA) as the default price convention for the interdealer sterling swaps market, moving away from pricing in GBP LIBOR. This is intended to accelerate the transition to SONIA derivatives trading. The Working Group on Sterling Risk-Free Reference Rates has recommended that the initiation of new GBP LIBOR linked linear derivatives expiring after 2021 cease by the end of Q1 20212.
On 21 October, the Financial Services Bill 2019-21 was introduced into the UK Parliament. Among other things, the Bill grants the FCA greater powers to compel the continued publication of benchmarks. This is aimed at helping a narrow pool of ‘tough legacy’ LIBOR contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended. Further background on the proposed new powers can be found on the FCA website.
In Singapore, the Steering Committee for SOR Transition to SORA issued timelines to cease the issuance of financial products linked to the Singapore Dollar Swap Offer Rate (SOR), which uses USD LIBOR in its computation. SOR-based markets will transition to the Singapore Overnight Rate Average (SORA)2.
In Hong Kong, the HKMA, in consultation with the Treasury Markets Association, has developed LIBOR transition milestones which state that, by 30 June 2021, Authorised Institutions are to cease issuing new LIBOR-linked products maturing after 2021.
The CommBank has established a Group-wide transition program and developed the capability to transact in RFRs to assist with transition needs.
CommBank intends to contact you at the appropriate time in the New Year to discuss LIBOR transition in more detail. In the meantime, we encourage you to remain up-to-date on industry developments related to LIBOR and contact your CommBank representative directly should you require further assistance. We also draw your attention to our Information Hub, which serves as a publicly accessible repository of relevant information on the topic.
We encourage you to seek independent advice regarding any legal or regulatory obligations which may arise through implementing different transition options, including but not limited to, derivatives transaction reporting rules, margining and collateral requirements or clearing obligations. These requirements may apply to you and us differently in different jurisdictions. Please also refer to your relevant authorities and independent advisors in relation to any accounting and tax consequences of transition.
It is important to note that LIBOR-referencing transactions maturing past LIBOR’s likely cessation may not perform as expected, both when LIBOR ends and potentially before that as liquidity in LIBOR-referencing instruments is likely to decline. If you plan to enter into any new LIBOR-referencing derivatives transactions maturing past 31 December 2021, please read the important disclosure here.
If you have any further questions regarding benchmark reform, please contact your CommBank representative or the Interest Rate Benchmark Reform Program directly on IRBR@cba.com.au.
2 Refer to the working group’s website for further details, including references to risk management of existing positions and a relevant timeline for non-linear derivatives.
3 Refer to the website of the Association of Banks in Singapore for details.
This information is published solely for information purposes. It is not to be construed as a solicitation, an offer or recommendation by the Commonwealth Bank of Australia (the “Bank”). As this information has been prepared without considering your objectives, financial situation or needs, you should before acting on the information, consider its appropriateness to your circumstances. It must not be relied upon as investment research. The Bank believes that the information is correct and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made. Commonwealth Bank of Australia ABN 48 123 123 124. AFSL and Australian Credit Licence 234945.