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IBOR Transition

Key Updates

ISDA Protocol and Supplement now in effect

The International Swaps and Derivatives Association (ISDA) IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol took effect on 25 January 2021. New contracts that reference ISDA’s standard interest rate definitions executed from January 25 include new fallbacks linked to key Interbank Offered Rates (IBORs). Legacy non-cleared derivative contracts where both counterparties bilaterally agreed to include the definitions or have adhered to the ISDA 2020 IBOR Fallbacks Protocol will include the new fallbacks.

LIBOR Spread Adjustment fixed on 5 March 2021

Upon an announcement of permanent or pre-cessation, the spread adjustment under the ISDA Fallbacks for LIBOR becomes fixed. On 5 March 2021 the UK Financial Conduct Authority (FCA) issued an announcement regarding the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by ICE Benchmark Administration (IBA), an authorised administrator, regulated and supervised by the FCA. As a result, ISDA announced that 5 March 2021 is the ‘Spread Adjustment Fixing Date’ for all LIBOR Tenors across all LIBOR currencies.
From 5 March 2021 the ‘Fallback Rate’ calculated for each ‘Rate Record Day’ uses the fixed Spread Adjustment provided by Bloomberg. For example, the LIBOR USD 3 months rate fixed spread adjustment is 0.26161%. All Fallback Rates calculated for a Record Day prior to 5 March 2021 use the Spread Adjustment previously published by Bloomberg for the applicable Rate Record Date.

  • Details about the spread adjustment, including definitions and calculation methodologies can be found in the ISDA IBOR Fallback Rate Adjustments Rule Book.
  • Bloomberg has been publishing the LIBOR fallback rates in accordance with ISDA's agreed methodology, starting from 21 July 2020. The real time data can be accessed via FBAK <GO> on Bloomberg Terminals, and is publicly available, with a delay, on the Bloomberg website.

Background

Major interest rate reference rates (such as LIBOR, EURIBOR, and TIBOR or generically known as IBORs) are widely used in the global financial system as benchmarks for a large volume and broad range of financial products and contracts.

In response to weaknesses identified in the setting of benchmarks such as the London Interbank Offered Rates (LIBOR), the global regulatory community has been involved in a program to strengthen benchmarks. 

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 these benchmarks.

Given the predominance of LIBOR reference rates across financial instrument documentation, any phase-out has major implications for the markets globally. Accordingly, the Australian market is preparing for the effects of this development, which is the most significant financial market development currently underway affecting markets.
 

AFMA's Involvement

AFMA facilitates industry dialogue and thinking about the broader implications associated with benchmark transition. AFMA provides secretariat functions for the IBOR Transformation Australian Working Group, which is the national working group for considering the strategic issues facing Australia.

 

AFMA supports the IOSCO January 2018 Statement on Matters to Consider in the Use of Financial Benchmarks that stipulates that users need to have robust fallback provisions in relevant contracts and instruments that reference a benchmark. If a permanent discontinuation of an IBOR or other benchmark occurs, any fallback provisions need to be robust enough to prevent potentially serious disruption to markets and market participants (including users and their clients), and to safeguard the continuity of contracts, as a result.



Further detail on developments across markets internationally and here in Australia is set out below.

 
Australia - Official Sector Updates
Official sector announcements, developments, consultations and activities in Australia.
 

Official Body

Details

Reserve Bank of Australia

The Reserve Bank of Australia (RBA) is Australia's central bank and derives its functions and powers from the Reserve Bank Act 1959. Its duty is to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people. It does this by setting the cash rate to meet an agreed medium-term inflation target, working to maintain a strong financial system and efficient payments system, and issuing the nation's banknotes.

On 18 March 2021 RBA Assistant Governor Christopher Kent gave an address to ISDA Benchmark Strategies Forum Asia Pacific, emphasising that orderly transition away from LIBOR is important for the smooth functioning of financial markets and the stability of the financial system.

RBA Consultation on draft repo eligibility criteria

RBA recently conducted a consultation on draft repo eligibility criteria, which will require fallbacks for new BBSW-linked securities issued on or after 1 July 2022. Securities issued before 1 July 2022 will be grandfathered, except for internal asset-backed securities (self-securitisations).

All floating rate notes (FRNs) and asset-backed securities issued on or after 1 July 2022, where BBSW is the relevant interest rate for the purposes of calculating coupons, must meet the following criteria in order to be eligible for purchase by the Reserve Bank under repo:

·      Include at least one ‘robust’ and ‘reasonable and fair’ fallback for BBSW in the event that it permanently ceases to exist.

·      A ‘robust’ fallback is one that clearly specifies the method for the calculation of interest that would apply for the purposes of calculating coupon payments. The fallback must also specify a clear and unambiguous trigger event after which the fallback would apply. Acceptable fallbacks would include those that reference AONIA (including AONIA plus or minus a fixed spread). Fallbacks that reference another benchmark interest rate may also be accepted at the Reserve Bank’s discretion.

·      A ‘reasonable and fair’ fallback is one that reasonably mitigates the impact on the economic value of the security in the event the fallback is invoked. A fixed-rate fallback would not be considered reasonable and fair for the purposes of these criteria.

·      The robust and reasonable and fair fallback(s) must sit above any other fallbacks that rely on collecting dealer quotes, or on discretion – whether by the issuer, the calculation agent, or any other related or third party – in the fallback waterfall.

All self-securitisations, regardless of the date of issue, will also be required to include at least one robust and reasonable and fair fallback in order to be eligible.

FRNs and other asset-backed securities issued before 1 July 2022 will not be subject to this requirement for eligibility. Nevertheless, the inclusion of robust and reasonable and fair fallbacks for such securities, depending on their length of time to maturity, is recommended as a matter of prudent risk management.

The criteria do not specify the fallback language to be included in security documentation as RBA expects this to be developed by industry participants. AFMA responded to the consultation supporting the criteria and the encouragement to the market to develop and incorporate robust fallback language for securities in general.

 


ASIC

ASIC is Australia's integrated corporate, markets, financial services and consumer credit regulator.

 


In May 2019 ASIC wrote to the CEOs of major Australian financial institutions regarding their preparations for the transition from LIBOR to alternative benchmark rates. The purpose of this letter was stated as to gain an understanding of financial institutions' preparedness for the LIBOR transition and related risks.
 

In 2019, in response to a letter from the IBOR Transformation Australian Working Group to the Council of Financial Regulators, ASIC sent a letter that addresses conduct risk in relation to the transition to RFRs and client communications. ASIC’s guidance letter is available here.

ASIC published guidance on managing conduct risk during LIBOR transition in April 2020.

In May 2020, ASIC sent out a letter to a number of large corporations in Australia regarding the transition to ARRs to highlight the need to plan for LIBOR transition and to encourage entities to start the transition early. The letter is available here.

With the support of the Australian Prudential Regulation Authority (APRA) and the RBA, ASIC released a statement on 13 October 2020 urging Australian institutions to adhere to the ISDA Protocol and Supplement.

 

Australia - Industry Updates
Developments and work by industry to address change through groups and commercial endeavours elsewhere to Australia, especially the work of AFMA.
 

Industry Body


Details


AFMA

 


As AFMA has worked with members and other market participants over the last couple of years on IBOR transition issues it has become clear that the term ‘AONIA’ is the subject of some misunderstanding and confusion. To assist the market, AFMA published a definition of AONIA in late 2020 to clarify its meaning.

 
  • AFMA IBOR Market Responses Group Recommendation to follow ISDA methodology and conform to RBA fallback criteria


The AFMA IBOR Market Responses Group met on 9 February. After briefing on the state of play on IBOR transition issues and developments, and the direction of the ITAWG, the Group focused its deliberation on the fallback for FRNs.


An important consideration that weighed on their arriving at the recommendation was the need to use the officially identified RFRs and an objectively set spread adjustment, which would meet conduct expectations set by ASIC - particularly with regard to fairness by having a generally accepted standard. Other factors cited were global consistency and alignment with fallbacks for related hedges because of possible basis risk.


The Group recommended that fallbacks for securities such as FRNs should follow the ISDA Protocol methodology and satisfy the RBA fallback criteria.
 

  • AFMA IBOR FRN Fallbacks Working Group established in March 2021


In response to the AFMA IBOR Market Responses Group recommendation, the AFMA DCM Legal Committee set up a further working group to develop template FRN fallback language. The IBOR FRN Fallbacks working group had its first meeting on 25 March 2021.


AFMA has established liaison with parallel work streams in the Asia Pacific Loan Market Association (APLMA) and the Australian Securitisation Forum (ASF) with consistency across product categories being an important object. When draft template FRN fallback language is created it will be socialised across the market. Such template language will be only an advisory guide to assist the market and it will be up to individual issuers to determine for themselves what fallback language they use.
 


APLMA

The Asia Pacific Loan Markets Association (APLMA) mission is to increase liquidity, efficiency and transparency in the primary and secondary syndicated loan markets in the Asia Pacific region. It advocates best practices in the syndicated loan market, promulgates standard loan documentation and seeks to promote the syndicated loan as one of the key debt products available to borrowers across the region.

 


APLMA has a number of LIBOR transition related documents and guidance notes available to members on its website, and its preparing a number of discussion draft facility agreements in consultation with members.


ASF

The Australian Securitisation Forum (ASF) is the peak industry body representing participants in the Australian securitisation market, which include major banks, smaller Authorised Deposit-Taking Institutions, non-bank issuers, fixed income investors and service providers to the sector.

 


No updates at this stage.


ASX

ASX is one of the world’s leading financial market exchanges, offering a full suite of services, including listings, trading, clearing and settlement, across a comprehensive range of asset classes. ASX administers and publishes BBSW, Australia’s benchmark short term interest rate.

 


No updates at this stage.


IBOR Transformation Australian Working Group

 

The IBOR Transformation Australian Working Group is the national working group that considers the strategic issues facing Australia as the market is transformed by IBOR transition.

 


Information on the work of the Australian Working Group is available here.


FTA

The Finance and Treasury Association (FTA) is the peak professional body in Australia for corporate treasurers and senior financial risk managers.

 


The FTA published a guide prepared by Deloitte in May 2019, outlining the impact of LIBOR replacement on Australian Corporates.

International - Official Sector Updates
Links to official sector announcements, developments, consultations and activities at the global level and in jurisdictions elsewhere to Australia.
 

Jurisdiction

Official Body

 

Global


BIS

Established in 1930, the Bank for International Settlements (BIS) is owned by 60 central banks, representing countries from around the world that together account for about 95% of world GDP.

 
 


BIS published a working paper in October 2020 looking at different ways of constructing term rates from overnight rates.


FSB-OSSG

In July 2013 the Financial Stability Board established an Official Sector Steering Group (OSSG), which comprises senior officials from central banks and regulatory authorities. The FSB’s work is focused on interest rate benchmarks that are considered to play the most fundamental role in the global financial system.


 


An overview of the FSB’s work on benchmarks is available from their website.

 

In November 2020 FSB produced a progress report titled Reforming Major Interest Rate Benchmarks: 2020 Progress report.


IOSCO

The International Organization of Securities Commissions (IOSCO) is the international body that brings together the world's securities regulators and is recognized as the global standard setter for the securities sector. IOSCO develops, implements and promotes adherence to internationally recognized standards for securities regulation. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda. IOSCO developed and published its Principles for Financial Benchmarks, which have been endorsed by the G20.

 
 


Statement on Communication and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition

 
 


IASBIRFS

The International Accounting Standards Board (IASB) is the independent, accounting standard-setting body of the IFRS Foundation. The IFRS Foundation is a not-for-profit, public interest organisation established to develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards.

 

The IFRS met in January 2020 met to discuss the following issues that could result from the reform of interest rate benchmarks:

-          the relationship between the Board's project plan and its current stage;

-          the potential effects of IBOR reform on IFRS Standards other than those related to financial instruments accounting;

-          the potential disclosure requirements to accompany the Board's tentative decisions for Phase 2 of the project (covering post-benchmark replacement issues); and

-          updates to IFRS Taxonomy for IBOR reform.

 

In January 2019, IASB issued a proposal on IBOR Transition and its effects on Financial Reporting.

July 2019 FASB | IASB Joint Meeting

 

UK


BoE

The Bank of England (BoE) is the UK Central Bank.


The BoE maintains a page on their website containing key updates related to transition from LIBOR to risk-free rates.


FCA

The Financial Conduct Authority (FCA) is the conduct regulator for 59,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms.


In early 2021 FCA announced the timing for the cessation or loss of representativeness of all 35 LIBOR settings, giving firms a clear set of deadlines across all currencies and tenors.

 

Following a consultation by ICE Benchmark Administration (IBA), the administrator of LIBOR, the FCA confirmed that all seven tenors for both euro and Swiss franc LIBOR, overnight, one-week, two-month and 12-month sterling LIBOR, spot next, one-week, two-month and 12-month yen LIBOR and one-week and two-month US dollar LIBOR will permanently cease immediately after December 31, 2021. Publication of the overnight and 12-month US dollar LIBOR settings will cease for good immediately after June 30, 2023.

 

FCA also announced that it will consult on the use of the proposed powers under the UK Financial Services Bill to require IBA to publish the 1-month, 3‑month and 6-month JPY LIBOR settings on a synthetic basis (synthetic LIBOR) for one additional year after end-2021.

Europe


ESMA

The European Securities and Markets Authority (ESMA) forms part of the European System of Financial Supervision (ESFS), a decentralised, multi-layered system of micro- and macro-prudential authorities established by the European institutions in order to ensure consistent and coherent financial supervision in the EU.

 
 


ESMA has introduced a Benchmarks Regulation that brings about a regime for benchmark administrators that ensures the accuracy and integrity of benchmarks.

 

ESMA has been part of a working group with the Financial Services and Markets Authority (FSMA), the European Central Bank (ECB) and the European Commission since 2017, the identification and adoption of a risk-free overnight rate which can serve as a basis for an alternative to current benchmarks used in a variety of financial instruments and contracts in the euro area.

 


ECB

The European Central Bank (ECB) is the central bank of the 19 European Union countries which have adopted the euro. Its main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.

 
 


The ECB established a private sector working group on euro risk-free rates in 2018.

 

Key milestones of the working group on risk free rates are listed here on the ECB website.


CH-FINMA

The Swiss Financial Market Supervisory Authority (FINMA) is Switzerland’s independent financial-markets regulator. FINMA is responsible for ensuring that Switzerland’s financial markets function effectively, including market preparedness for IBOR transition.

 
 


FINMA published guidance detailing the risks associated with LIBOR replacement in 2018, and additional guidance setting out a LIBOR transition roadmap in 2020.


SNB

The Swiss National Bank conducts the country’s monetary policy as an independent central bank. It is obliged by the Constitution and by statute to act in accordance with the interests of the country as a whole. Its primary goal is to ensure price stability, while taking due account of economic developments. In so doing, it creates an appropriate environment for economic growth.

 
 


Updates from the Swiss National Working Group on Swiss Franc Reference Rates are available from the SNB website.

Americas


US Federal Reserve Board

The Federal Reserve is the central bank of the United States.


The United States Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency has previously issued a statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by 31 December 2021. New contracts entered into before 31 December 2021 should either utilise a reference rate other than LIBOR or have robust fallback language that includes a clearly‑defined alternative reference rate after LIBOR’s discontinuation.


FRB - ARRC

The Alternative Reference Rates Committee (ARRC) is a group of private-market participants convened by the Federal Reserve Board and the New York Federal Reserve Bank of New York to help ensure a successful transition from U.S. dollar (USD) LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR). It is the principal leadership forum on IBOR transition issues, although primarily focused on the needs of the US market.

 


ARRC has published a white paper that contains a formula to calculate a fallback from the USD LIBOR ICE Swap Rate to a spread-adjusted SOFR Swap Rate.

 

The New York Fiscal Year 2022 Executive Budget includes the Alternative Reference Rates Committee (ARRC)’s proposed New York LIBOR legislation. The bill, if passed, would allow contracts where the contract language is silent or the contract’s fallback provisions recommend the use of LIBOR, to use replacement rates as recommended by the Federal Reserve, the New York Fed, or the ARRC.

Asia


Bank of Japan

The Bank of Japan is the central bank of Japan. It is a juridical person established under the Bank of Japan Act and is not a government agency or a private corporation.

 
 


In 2018 BoJ established a Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, consisting of a wide range of parties including financial institutions, institutional investors, and non-financial corporates, which was set up to prepare for permanent cessation of LIBOR.


Bank of Thailand (BOT)

As the central bank of Thailand, BoT is responsible for promoting monetary stability and formulating monetary policy for Thailand.


The Steering Committee on Commercial Banks' Preparedness on LIBOR Discontinuation and the Bank of Thailand (BOT) set out transition milestones for financial institutions to move away from the Thai Baht Interest Rate Fixing (THBFIX) and to expedite the adoption of Thai Overnight Repurchase Rate (THOR), the Thai Baht risk free rate. The milestones indicate that financial institutions should cease offering new loans, bonds and structured products referencing THBFIX with maturity after 2021 by 1 July 2021, and that the publication of THBFIX is targeted to cease by end-2024.


HKMA

The HKMA is the government authority in Hong Kong responsible for maintaining monetary and banking stability. As an international financial centre and a member of the FSB, Hong Kong is obliged to identify an alternative reference rate (ARR) for HIBOR

 

 


HKMA issued a circular in July 2020 to announce the key milestones that authorised institutions (AIs) should endeavour to achieve in the transition from LIBOR to alternative reference rates (ARRs).

 

An overview of HKMA’s work in this space is available on their website.

Oceania


Reserve Bank of New Zealand

The Reserve Bank manages monetary policy to maintain price stability, promotes the maintenance of a sound and efficient financial system, and supplies New Zealand banknotes and coins.

 
 


RBNZ has supported the selection of the Official Cash Rate (OCR) as the fallback benchmark interest rate in New Zealand, which is administered by the New Zealand Financial Markets Association (NZFMA).

International - Industry Updates
Links to developments and work by industry to address change through groups and commercial endeavours elsewhere to Australia.
 

Jurisdiction

Industry Body

 

Global


ISDA

The International Swaps and Derivatives Association (ISDA) is a trade organization of participants in the market for over-the-counter derivatives. Its standardised contract - the ISDA Master Agreement - is used to enter into derivatives transactions. Its mission is to foster safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products.

 
 


ISDA maintains a page relating to financial benchmark reform and the transition from LIBOR which is kept updated as new information becomes available. An ISDA guide to IBOR and benchmark fallbacks is available here.

 

Recently ISDA produced guidance covering how the terms of the ISDA 2020 IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement apply in relation to euro LIBOR, sterling LIBOR, Swiss franc LIBOR, US dollar LIBOR, yen LIBOR, the Singapore dollar Swap Offer Rate and the Thai Baht Interest Rate Fixing.

 

In October 2020, ISDA published a Supplement to amend its 2006 ISDA Definitions to include fallback language that would apply upon the permanent discontinuation of certain key IBORs and upon a 'non-representative' determination for LIBOR.

 

ISDA also launched a protocol to allow participants to incorporate the revisions into legacy trades across all IBORs.

 


ICMA

International Capital Market Association (ICMA) represents both the buy side and sell side of the debt capital markets industry. It focuses on a comprehensive range of regulatory and market practice issues, and prioritises four core areas – primary markets, secondary markets, repo and collateral markets, and the green and social bond markets.

 


Updates from ICMA on global benchmark reform and the transition to risk-free rates are available on the ICMA website.

 

ICMA produced a Quick Guide to the transition to risk free rates in the international bond market on 27 February 2020.


ICE Benchmark Administration (IBA)


On 5 March ICE Benchmark Administration (IBA) announced intentions to cease the publication of panel-based LIBOR immediately after end-2021 (except for certain US dollar LIBOR settings).

 

On 11 January 2021, Refinitiv Benchmark Services (UK) Limited and the ICE Benchmark Administration (IBA) began publishing forward-looking SONIA term risk-free rates. The published Term SONIA is available for one, three, six, and 12-month tenors.


GFMA

Global Financial Markets Association (GFMA)


GFMA published a guide on 31 March 2021 outlining the various parts and players in the IBOR transition process.

UK


FMSB

The FICC Markets Standards Board (FMSB) is a standards setting body for the wholesale fixed income, currencies and commodities (FICC) markets.
 


Following the February meeting of the Bank of England SONIA stakeholder advisory group, the FSMB has produced a draft standard on the use of Term SONIA reference rates for consultation. The Standard sets out certain expected behaviours of markets participants when using or issuing Term SONIA products in light of the reduced systemic risks associated with overnight risk-free rates. 


Working Group on Sterling Risk Free Reference Rates (RFRWG)


The Working Group on Sterling Risk Free Reference Rates (RFRWG) has published the Path to Ending New Use of GBP LIBOR-linked derivatives which offers guidance related to GBP LIBOR dealings after the end of Q1 2021.

Europe


afme

The Association for Financial Markets in Europe (afme) is the voice of all Europe’s wholesale financial markets, providing expertise across a broad range of regulatory and capital markets issues.


Updates from AFME are available from a dedicated IBOR transition page on their website.

 

AFME has published model wording for new issues of securitisation bonds to help facilitate the transition from IBORs to new risk-free rates.

 

 

Americas


Refinitiv Benchmark Services (UK) Limited, the administrator for Canadian Dollar Offered Rate (CDOR)


Refinitiv Benchmark Services (UK) Limited, the administrator for Canadian Dollar Offered Rate (CDOR) announced that the calculation and publication of the 6-month and 12-month CDOR tenors will cease on 17 May 2021 with the final publication for the 6-month and 12-month CDOR tenors on 14 May 2021. In response, ISDA provided guidance on how to manage over‑the‑counter derivatives that may be affected by the cessation of the publication of 6-month and 12‑month CDOR.

 

 

Asia


ABS

The Association of Banks in Singapore (ABS) is a non-profit organisation that represents the interests of the commercial and investment banking community in Singapore

 


ABS published a media release in March 2021 outlining new timelines to cease issuance of SOR derivatives and SIBOR-linked financial products.


Steering Committee for Swap Offered Rate (SOR) & Singapore Interbank Offered Rate (SIBOR) Transition to Singapore Overnight Rate Average (SORA) (SC-STS)


The SC-STS published a document which outlines steps and activities in support of the transition to SORA. Key steps outlined include broadening and deepening liquidity in SORA markets, early cessation of new SOR and SIBOR contracts, and supporting active transition of SOR linked legacy contracts.


TMA

The Treasury Markets Association (TMA) was incorporated through the institutionalisation of the Treasury Markets Forum of Hong Kong and the merger with ACI-The Financial Markets Association of Hong Kong in 2005. Principal functions of the TMA include promoting co-operation and synergy among market practitioners with a view to enhancing professionalism and the overall competitiveness of the treasury markets in Hong Kong, thereby maintaining the role as an international financial centre.

 
 


The TBA has a summary of IBOR related developments on its website.

 

 

Oceania


NZFMA

The New Zealand Financial Markets Association (NZFMA) represents the interests of its members in ensuring the sound management of the over-the-counter financial markets. It also maintains and is the Benchmark Administrator for benchmarks, notably BKBM.

 
 


The New Zealand Financial Markets Association (NZFMA), in consultation with industry, is making improvements to the benchmark regime to ensure that Bank Bill Benchmark rate (BKBM) remains fit for purpose and meets international regulatory guidelines. After RBNZ supported the selection of the Official Cash Rate (OCR) as the fallback benchmark interest rate in New Zealand, the NZFMA is developing an OCR Compound Index and calculators to facilitate this new role of the OCR.


AFMA


See Australian updates.