Since the 1980s, interest rate benchmarks, known as Interbank Offered Rates (IBORs) have been part of daily life for financial markets world-wide.
These benchmarks are embedded in the pricing of significant numbers of financial products including many loans, mortgages, bonds, derivatives, ETFs, and structured investment products.
The validity of the five major IBORs has diminished significantly over the time, with the interbank lending markets they once measured now almost non-existent. The IBORs are vulnerable to potential discontinuation, and more robust Risk Free Rate (RFR) alternatives are being developed. This was recommended in 2014 by the Financial Stability Board, the international industry body.
In the UK, the London Interbank Offered Rate (LIBOR) is also expected to discontinue at the end of 2021, with an alternative benchmark, the Sterling Overnight Index Average (SONIA) for Sterling products identified as the risk free alternative. The expected discontinuation of LIBOR includes USD, EUR, JPY, and CHF LIBORs, with the replacement benchmarks being the identified alternative risk free rates in each jurisdiction.
In the European Union, for example, the EONIA (Euro Overnight Index Average) benchmark is being discontinued and a new RFR benchmark called the Euro Short-Term Rate (€STR) has been introduced.
Reforms are taking place in many other countries including the US, Japan, Switzerland, Hong Kong, Canada, Singapore, China, Indonesia, Thailand, India, Philippines and Australia.
These changes will require the contracts of some products to be changed so that they reference the alternative Risk Free Rates. Regulators have stressed that this is a complex and time-consuming process and have encouraged all users of financial products to take action now to prepare.
The timetable for these changes varies according to jurisdiction. EONIA and the LIBORs are expected to discontinue after by the end of 2021, with the FCA and global RFR Working Groups (WGs) regularly reinforcing that all LIBOR and EONIA referencing products must transition to alternative Risk Free Rates before that date.
Some earlier interim deadlines exist as part of a more detailed transition plan set out by the RFR WGs. For example, the Bank of England has said that LIBOR-linked loans may not be offered after Q3 2020, except at a client’s request, with the default being a non-LIBOR benchmark, and if LIBOR is transacted, the contract must include pre-agreed language for conversion to an alternative rate prior to the end of 2021.
Deutsche Bank is actively involved in industry efforts supporting transition to IBOR alternatives having taken extensive steps to prepare for the discontinuation of IBORs and is working with clients to ensure awareness of the expected changes and preparedness for transition.
Clients are encouraged to reach out to their relationship manager or sales representative to find out more information on how IBOR transition will impact them. Alternatively, please email our dedicated team at email@example.com.
More information on the implication of IBOR transition for retail, institutional and corporate clients can be found on the individual client type pages on this site.