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International conversion from LIBOR
In light of the international global conversion of benchmark interest rate index transition from LIBOR to RFR as a much resilient rate, we are delighted to inform that the new interest rate index will be applied on all existing and new Loans contracts starting 01/8/2021 with specified timeline.
LIBOR:
The London Interbank Offered Rate (“LIBOR”) is a benchmark interest rate index used in setting the interest rate for many variable-rate loans and other financial obligations.
LIBOR is currently set to be phased out in stages, with the first stage scheduled to begin on Dec 31st,2021
Why LIBOR VS. RFR:
The Risk-Free Interest Rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. They are generally based on the overnight monetary market. They are based solely on transactions, which must makes them more reliable than LIBORs.
Planned transition plan:
On November 30, 2020, the International Exchange (ICE) Benchmark Administration (the “IBA”), the administrator of LIBOR, announced its intention to cease publishing one-week and two-month LIBOR on December 31, 2021 and the remaining tenors (overnight, one-month, three-month, six-month and 12-month) on June 30, 2023.
The IBA expects to finalize this plan soon. In response, the Board of Governors of the Federal Reserve System, the Office of the Controller of the Currency and the Federal Deposit Insurance Corporation (collectively, the “Agencies”) have jointly recommended that banks cease entering into new contracts using LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.
In addition, the Agencies advise that new contracts entered into prior to December 31, 2021 should either use a reference rate other than LIBOR or include effective fallback language with a clearly-defined alternative reference rate effective upon the discontinuation of LIBOR.
Transition Impact:
Accordingly, it should be noted that, for existing contracts, the transition to a new benchmark will require a spread adjustment between LIBORs and the replacement rate. The underlying agreements will determine an effective fallback clause.
For more information, customers are invited to contact their Relationship Managers.
Risk of LIBORs’ discontinuation:
As a result of benchmarks rates reforms, LIBORs could cease to exist after December 31, 2021 or become unrepresentative of their underlying markets.
Therefore, this change might lead to impacts of various kinds, in particular:- Operational (updating systems)- Legal (implementation of fallback clauses to allow for the transition or direct renegotiation of the contract to reference the replacement rate before the discontinuation of LIBORs)- Financial (asset / liability management ; spread adjustment between the old and the new index for the legacy) The exact modalities of these transitions – including the transition calendar – are not precisely defined yet, as they are still being discussed by national working groups and market associations under close monitoring by authorities.
It should be noted that, for existing contracts, the transition to a new benchmark will require a spread adjustment between LIBORs and the replacement rate.
For more information, customers are invited to contact their Relationship Managers.
For the Contingency plan overview, click here
