Recent developments

The transition to risk-free rates (RFRs) continues across all LIBOR currencies and asset classes.

Regulators and industry working groups have emphasised that transition from LIBOR before the end of 2021 remains essential, and have worked to revise plans to meet this timeline despite the disruptions resulting from COVID-19. 

Contractual fall-backs

Industry bodies have been working to develop further contractual clauses (‘fall-backs’) to better address LIBOR’s discontinuance by referencing a specified RFR as an alternative rate in the event LIBOR is discontinued permanently1.

These proposed fall-backs incorporate certain adjustments to ensure that contracts referencing LIBOR will continue to function as closely as possible to the original agreement, in the event LIBOR does cease. Whilst it is expected that these adjustments are broadly similar across asset classes, there may be differences across product types and asset classes. Therefore, there may be a potential mismatch in replacement rates and interest calculations across products in your portfolio.

Further discussion can be found here.

Industry recommendations in the US and UK loan markets 

Of the different asset classes, the loan market has been the slowest to adopt RFRs. Industry working groups have published various statements aimed at facilitating the transition to RFRs in the loan market specifically. These include specific timelines of transition.

We intend to follow the recommendations of the respective working groups as much as possible, and will be discussing what these may mean for you at the appropriate time. 

Further discussion can be found here.  

Transition, market liquidity and other developments 

From now until January 2022, we expect market liquidity to shift increasingly to RFRs.

Contracts referencing LIBOR may not continue to perform as expected, either when LIBOR ends and potentially before that, as liquidity in LIBOR-referencing instruments could decline prior to LIBOR’s expected discontinuance.

The continued development of liquidity in RFR markets, and the publication of industry-wide fall-backs will assist in your consideration of transition alternatives.

Transition alternatives include:

  • Adhering to a contractual fall-back solution adopted industry-wide (such as the ISDA protocol for derivatives transactions) or entering into a bilateral amendment agreement;
  • Restructuring your portfolio to reference RFRs instead of LIBOR;
  • Relying on the fall-backs within your existing documentation, if suitable; or
  • A combination of these and other actions.

Regulators have recommended transitioning contracts to RFRs prior to LIBOR discontinuing permanently, thereby avoiding the need to rely on contractual fall-backs altogether.

We intend to contact you at the appropriate time to discuss these alternatives in more detail. In the meantime, we encourage you to remain up-to-date on industry developments related to LIBOR and contact your Commonwealth Bank 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. 

Other implications

Even if you establish your firm has no balance sheet exposure, it may still be exposed to other risks from LIBOR transition including operational, legal and financial challenges. For example, you may need to change your pricing and valuation systems if a LIBOR rate is a key input.

In July 2020, the New York Fed’s Alternative Reference Rates Committee (ARRC) released a document that may be helpful in structuring your transition away from LIBOR.

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.

Accounting standard boards, such as the IASB, are finalising measures to facilitate the transition to RFRs. Please refer to your relevant authorities and independent advisors in relation to any accounting and tax consequences of transition.

As nothing in this document should be taken to be advice, we encourage you to seek independent advice on these matters.

What is Commonwealth Bank doing to prepare for LIBOR transition?

Commonwealth Bank has established a Group-wide transition program and developed the capability to transact in RFRs to assist you with your transition needs.

As discussed elsewhere in the text, we may approach you in the near future to discuss LIBOR, including the possible need for contractual changes.

What if you have more questions? 

If you have any further questions regarding benchmark reform, please contact your Commonwealth Bank representative or the Interest Rate Benchmark Reform Program directly on IRBR@cba.com.au.

Things you should know

A specified RFR may also be referenced upon a stated determination by the FCA that the LIBOR is not deemed ‘representative’ of an underlying market or economic reality. This could occur shortly prior to LIBOR’s permanent discontinuance. We refer to isda.org 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.