Interbank Offered Rate Reforms
Why is this relevant to you?
In July 2017, the Financial Conduct Authority (“FCA”), a regulatory body in the United Kingdom, stated that it will no longer compel banks which contribute to the calculation of London Interbank Offered Rate (“LIBOR”) to continue contributing beyond 2021. It has created uncertainty and implied that LIBOR may be discontinued and/or it may be declared unrepresentative. Considering this risk, market participants are encouraged by the FCA and other regulators to stop referencing LIBOR as the benchmark for transactions.
Market participants should use Alternative reference rates (“ARRs”) such as alternative “risk-free” rates (“RFRs”) instead of LIBOR if LIBOR is permanently discontinued. Regulatory bodies across the globe are also considering carrying out a reform of some other IBORs and benchmarks due to industry practices and regulatory requirements, and, in some cases, they may or may not be discontinued. For IBORs such as EURIBOR, HIBOR and TIBOR, CMB Wing Lung Bank does not anticipate any changes as there is currently no plan to discontinue and so they are expected to continue alongside the respective ARRs.
What are the new benchmark rates (ARRs)?
ARRs are overnight interest rate benchmarks, which the FCA and other regulators perceived to be more representative and reliable as a measure of “risk-free” rates than IBOR. Financial contracts referencing IBORs (especially those referencing LIBOR) may require amendments to incorporate the replacement interest rate to be used in certain scenarios such as the IBOR ceasing (as a “fallback” provision ) or to specifically replace IBOR with references to an ARR. The ARRs currently identified behave differently from the LIBOR in many respects, such as the calculation methodologies. As a result, if an ARR is used in place of an IBOR payments under the product and/or the value of the product may be impacted. This may materially impact the economic value of the relevant financial transactions and hedging arrangements, such as liabilities/assets associated with IBOR.
For more information
If customers would like more general information on interest rate reform and IBOR transition, please refer to the published information from regulators, working groups and other industry bodies, including:
- U.S.
Alternative Reference Rates Committee (ARRC)
https://www.newyorkfed.org/arrc - European
Central Bank (ECB)
https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_risk-free_rates/html/index.en.html - Bank
of England
https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor - Financial
Conduct Authority (FCA)
https://www.fca.org.uk/markets/benchmarks - Bank
of Japan
https://www.boj.or.jp/en/paym/market/sg/index.htm/ - Swiss
National Bank (SNB)
https://www.snb.ch/en/ifor/finmkt/fnmkt _benchm/id/finmkt_reformrates - Treasury Markets Association (TMA)
https://www.tma.org.hk/en_market_LIBOR.aspx - Financial
Stability Board (FSB)
https://www.fsb.org/work-of-the-fsb/policy-development/additional-policy-areas/financial-benchmarks - International
Swaps and Derivatives Association (ISDA)
https://www.isda.org/category/legal/benchmarks
In case of discrepancies between the English and Chinese versions, the English version shall prevail.
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