What's happening

  • The 24 LIBOR settings that have ended are:

    • all euro and Swiss franc LIBOR settings
    • the overnight / spot next, 1-week, 2-month and 12-month sterling and Japanese yen LIBOR settings
    • the 1-week and 2-month USD LIBOR settings

    The 1, 3 and 6 month sterling and Japanese yen LIBOR settings are now permanently unrepresentative of the underlying market they seek to measure. This is because the panel of banks, which used to provide submissions to create these rates, has now ended and so the administrator is no longer able to publish on the basis of its panel bank contributions-based methodology.

    From 1 January 2022, these 6 LIBOR settings are being calculated in a way that does not rely on submissions from panel banks, instead using an FCA prescribed methodology, which is no longer representative, and referred to in the market as. “synthetic” LIBOR. The synthetic rate has been chosen by the FCA to provide a reasonable and fair approximation of what panel bank determined LIBOR might have been in the future. Synthetic yen LIBOR will cease at the end of 2022 and the availability of synthetic sterling LIBOR is not guaranteed beyond end-2022. Synthetic LIBOR cannot be used in new contracts.

    **Exceptions may apply among others, to market making in support of client activity related to USD LIBOR transactions executed before 1 January 2022 or transactions that reduce or hedge client USD LIBOR exposure on contracts entered into before 1 January 2022. We monitor carefully any use of these exceptions, which we expect to be very rare.

    A ‘new contract’ would include an agreement that creates additional LIBOR exposure or that extends the term of an existing LIBOR contract. A draw on an existing agreement that is legally enforceable (e.g., a committed credit facility) would not be viewed as a new contract.

    ** Limited exceptions to the ban of new use USD LIBOR are:

    • Transactions that reduce or hedge our or any of our clients’ US dollar LIBOR exposure on contracts entereld into before 1 January 2022.
    • Market making in support of client activity related to US dollar LIBOR transactions executed before 1 January 2022. This only applies where the market making is undertaken in response to a request by a client seeking to reduce or hedge their US dollar LIBOR exposure on contracts entered into before 1 January 2022. 
    • Novations of US dollar LIBOR transactions executed before 1 January 2022. 
    • Transactions executed for purposes of participation in a CCP auction procedure in the case of a member default, including transactions to hedge the resulting US dollar LIBOR exposure. 
    • Interpolation within contractual fallback arrangements for the ceasing US dollar settings - 1 week and 2 month. 
    • New single currency USD LIBOR basis swaps entered into in the interdealer broker market - to the extent they would constitute new use, in order to disperse exposure acquired under that activity.

Risk-free-rates (RFRs)

Contractual changes

A number of industry groups have been working to develop clauses (“fallbacks”) to help contracts better address LIBOR’s discontinuance by referencing a specified RFR as a fallback in the event LIBOR is discontinued permanently (or, in some cases, is no longer deemed ‘representative’ by the regulator).

However, there are fundamental differences between LIBORs and RFRs. For example, RFRs are overnight rates, while LIBORs are available in multiple tenors. Additionally, LIBORs incorporate a bank credit risk premium while RFRs do not. As a result of these differences, both term and spread adjustments are required to be made to the applicable fallback RFRs to ensure that contracts referencing LIBOR will continue to function as closely as possible to the original agreement, in the event that the fallbacks are activated.

ISDA launched the IBOR Fallbacks Supplement (“Supplement”) to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol (“Protocol”) on 23 October 2020. CommBank adhered to the Protocol shortly after.  The provisions of the Supplement are included in all new derivative contracts as of  25 January 2021 so that all IBOR derivatives contracts entered into on and after that date referencing the 2006 ISDA Definitions will contain the new fallbacks. Legacy non-cleared derivatives contracts (those entered into pre 25 January 2021) will only incorporate the new fallbacks if both parties to the contract adhered to the Protocol, or otherwise bilaterally agreed to include the new fallbacks in their contracts. The Protocol remains open for adherence.

The fallback clauses typically incorporate mechanisms for making the required term and spread adjustments and also define the ‘trigger’ that ends the contractual reference to LIBOR (being permanent cessation including non-representativeness of the rate) and ‘switches’ to the relevant fallback adjusted RFR.

Additional information can be found here: 

employees looking over graphs on large screen

Alternative risk-free reference rates (RFRs) 

RFRs have been identified for all major currencies as an alternative to LIBOR.

Table reproduced from Financial Stability Board website.  

State
Alternative RFR
Secured/Unsecured
US Dollar
Secured Overnight Financing Rate (SOFR)
Secured Treasury repo rate
Sterling
Sterling Overnight Index Average (SONIA) 
Unsecured wholesale rate
Japanese Yen
Tokyo Overnight Average Rate (TONA)
Unsecured wholesale rate
Euro
Euro Short-Term Rate (€STR)
Unsecured wholesale rate
Swiss Franc
Swiss Average Rate Overnight (SARON)
Secured general collateral repo rate

Risk-Free Rate movements in RFRs reflect changes in interest rates, whereas movements in LIBOR reflect both changes in interest rates and bank funding costs. By using a rate that is more closely aligned with actual interest rate movements, our customers are better able to manage their exposures, and are not exposed to sudden spikes in bank funding costs.

Liquidity in LIBOR-referencing products is expected to decline as the market approaches LIBOR’s discontinuance on 30 June 2023.

RFRs are overnight rates. Therefore an RFR ‘interest rate’ or ‘coupon rate’ for an interest period will typically be based on an average or a compounding of daily observations of the RFR throughout the interest period and is therefore determined at the end of the calculation period. In contrast, LIBOR is a forward-looking “term” rate that sets the interest rate or coupon rate at the beginning of the interest period. Forward looking RFR term rates are available in the GBP, USD, and yen markets but their use is expected to be limited. In the sterling market UK, term SONIA may be used for trade finance and export finance facilities but is not recommended for wider use in the institutional loan market. In the USD market, term SOFR may be used for most types of lending facilities and the derivatives used for hedging these facilities.

Contractual changes

A number of industry groups have been working to develop clauses (“fallbacks”) to help contracts better address LIBOR’s discontinuance by referencing a specified RFR as a fallback in the event LIBOR is discontinued permanently (or, in some cases, is no longer deemed ‘representative’ by the regulator).

However, there are fundamental differences between LIBORs and RFRs. For example, RFRs are overnight rates, while LIBORs are available in multiple tenors. Additionally, LIBORs incorporate a bank credit risk premium while RFRs do not. As a result of these differences, both term and spread adjustments are required to be made to the applicable fallback RFRs to ensure that contracts referencing LIBOR will continue to function as closely as possible to the original agreement, in the event that the fallbacks are activated.

ISDA launched the IBOR Fallbacks Supplement (“Supplement”) to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol (“Protocol”) on 23 October 2020. CommBank adhered to the Protocol shortly after.  The provisions of the Supplement are included in all new derivative contracts as of  25 January 2021 so that all IBOR derivatives contracts entered into on and after that date referencing the 2006 ISDA Definitions will contain the new fallbacks. Legacy non-cleared derivatives contracts (those entered into pre 25 January 2021) will only incorporate the new fallbacks if both parties to the contract adhered to the Protocol, or otherwise bilaterally agreed to include the new fallbacks in their contracts. The Protocol remains open for adherence.

The fallback clauses typically incorporate mechanisms for making the required term and spread adjustments and also define the ‘trigger’ that ends the contractual reference to LIBOR (being permanent cessation including non-representativeness of the rate) and ‘switches’ to the relevant fallback adjusted RFR.

Additional information can be found here: 

What this means for you

  • We do not expect that the continuing USD LIBOR settings themselves face unexpected volatility purely due to the fact they are ceasing. LIBOR panel banks are expected to continue to submit until 30-June-2023 and do not expect the quality of their input data materially to change in this relatively short period.

    However, there are likely to be changes in liquidity in US dollar LIBOR markets and you may therefore face increased costs in dealing products linked to the prohibited USD LIBOR versions as the transition progresses (particularly leading up to mid-2023). 

     The transition away from LIBOR raises a number of 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.

    You should seek independent advice regarding any legal or regulatory obligations that 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 vary in different jurisdictions.

    Accounting standard boards have considered various measures to facilitate the transition to RFRs. The measures that are being proposed, or have been adopted, affect financial reporting in the period during which there is uncertainty about contractual cash flows arising from the reform. Other measures that have been proposed would apply when actual changes are made to contractual cash flows and hedging relationships. Please refer to your relevant authorities and independent advisors in relation to any accounting and tax consequences of transition.

    Regulators have provided guidance on the steps market participants can take to start preparing for the transition. These include:

    1. Establish where your LIBOR exposures are
    2. Check your contract terms
    3. Familiarise yourself with RFRs, and what they mean for you and your business
    4. Speak to your bank, product provider, consult with a financial services professional or advisor.
  • What are my available options and what are the benefits and ramifications of each?

    As a result of cessation, some of these transition options might be available (non-exhaustive):

    • Relying on fallbacks or rate switches that are already in some documents;
    • Transitioning from LIBOR to alternative reference rates, including a forward looking rate if available;
    • Terminating the transaction;
    • Taking no action; or
    • Other options.

    Some of the options above might be available, however your actual options will depend on your contractual terms or any agreement between the bank and you.

    If you choose to take no action, you should be aware that we will be unable to continue to calculate amounts in reference to LIBOR after it ceases being published, and will therefore need to consider the other options available to it under the contract. Alternatively, in some jurisdictions outside Australia, legislative mechanisms may apply to impose an alternative interest rate methodology where none has been agreed before LIBOR ceases.

What CommBank is doing to facilitate LIBOR transition

  • About our Group-wide Program

    CommBank has a Groupwide transition program and has developed the capability to transact in RFRs to assist in your transition. Your CommBank representative will have been in contact with you already to discuss your options. If you have not been contacted, please contact your representative.

    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

Other interest rate benchmark reform

  • For certain other major IBORs, authorities are encouraging efforts to develop robust RFRs and to make derivatives and other contracts more robust to discontinuation, but it is recognised that transition to RFRs may take longer. For example, authorities in the euro area are promoting a robust RFR in euro short-term rate (€STR) produced by the ECB. With respect to EURIBOR, its methodology has been reformed and its administrator received an authorisation under the BMR in July 2019, which allows its continued use for the foreseeable future.

    In other currency areas, authorities do not at this time think that transition solely to RFRs is necessary and continue to support a multiple-rate approach. Examples include Australia, and, with regard to TIBOR, Japan.

  • Australian benchmark reform

    For the Australian dollar, the key interest rate benchmarks are the bank bill swap rates (BBSW) and the cash rate. Reforms have also been undertaken to enhance the robustness of BBSW.

    The Reserve bank of Australia (RBA) has stated that:

    ‘the critical difference between BBSW and LIBOR is that there are enough transactions in the local bank bill market each day to calculate a robust benchmark. Australia has an active bank bill market, where the major banks issue bills as a regular source of funding, and a wide range of wholesale investors purchase bills as a liquid cash management product’.

    As markets transition from referencing LIBOR to RFRs, there may be some corresponding migration away from BBSW towards the cash rate. This will depend on how international markets for products such as cross-currency basis swaps end up transitioning away from LIBOR.

Derivatives and Loan Market links

Note: These links are not comprehensive and do not cover all industries, supervisors or all of the issues associated with LIBOR transition.

4. Transition in the Derivatives market

Latest news

Things you should know

  • This information is published solely for information purposes and is not to be construed as a solicitation, an offer or recommendation by CommBank. The information may be incomplete or not up to date and may contain errors and omissions. It must not be relied upon as financial product advice and is not investment research. As this information has been prepared without considering your objectives, financial situation or needs, before acting on the information you should consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice. We believe that this information is correct at the time of publishing and any opinions, conclusions or recommendations are reasonably held 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 the accuracy, reliability or completeness of any statement made.