Policymakers around the world have determined that London Interbank Offering Rates (LIBORs) and LIBOR-derived benchmarks are no longer fit for purpose as they don’t reflect market financing practices and rely on ‘expert judgement’ rather than recorded transactions, which has made them susceptible to manipulation. As a result, policymakers have initiated a transition from LIBOR to a new set of risk-free rates (RFRs), which comply with new international standards for benchmarks.
In some jurisdictions and for certain financial products, parties may not be able to reference benchmarks that fail to meet regulatory requirements, such as those found in the International Organisation of Securities Commissions (IOSCO) standards and the EU Benchmarks Regulation (BMR).
What are fall-backs?
The fall-back language within a contract outlines the events and steps to be followed in order to produce an alternative reference rate if LIBOR is discontinued. In the case of derivatives, the International Swaps and Derivatives Association (ISDA) determined that fall-back rates should be based on RFRs that are compounded in arrears plus a credit adjustment spread. This was agreed following extensive industry consultations with an intent to minimise the economic impact of the fall-backs. ISDA published the IBOR fall-backs Supplement and Protocol that parties can use to implement the fall-backs in existing transactions.
On March 5th 2021, the FCA announced that all LIBOR settings will cease to be provided by any administrator or be no longer representative from December 31st 2021 for all GBP, EUR, CHF and JPY settings and some USD settings, and from June 30th 2023 for all remaining USD settings.
What are the impacts?
The reform is having multiple impacts on market participants, including changes in the way certain products and contracts will operate. Some contracts may already contain detailed fall-back provisions, while others specify fall-backs which may create their own challenges. All the while, some others have no fall-back provisions at all. Parties need to make their own assessment of their contractual arrangements and of the impact of LIBOR cessation on their positions, and engage as necessary with their counterparties to discuss any form of amendment to insert fall-back arrangements or to actively transition to alternative rates. BNP Paribas is able to support its clients with reviewing portfolios in this manner.
There are also operational and IT impacts to consider, such as whether internal processes or systems are capable of handling LIBOR-linked products using fall-backs or transitioning to RFRs (e.g. from a ‘forward looking’ LIBOR fixing to a compounded in arrears i.e. ‘Backward looking’ RFR).
Firms must also be aware that if a product ‘falls-back’ to a different rate, it may no longer be suitable for its intended purpose, e.g. risk management/hedging an existing position. Market participants should also be aware of working group recommendations for ceasing of new LIBOR-linked transactions for certain products and be aware of the fast approaching (or passed) milestones (see BoE Milestones for GBP LIBOR and the Fed Supervision and Regulations Letter for USD LIBOR).
How can BNP Paribas support clients?
“We have already signed up to the ISDA protocol to introduce the new fall-backs in our legacy derivatives transactions with other adhering entities, and started early in reaching out to our counterparts who have yet to adhere, to understand their plans regarding adherence or whether they will seek an alternative solution, and help them navigate the process.” commented Joe Squires, Co-Head of G10 Rates EMEA & GM Sponsor of the IBOR Transition Programme, BNP Paribas.
We fully support the transition to RFRs and believe in taking a proactive approach to support clients with the changeJoe Squires, Co-Head of G10 Rates EMEA & GM Sponsor of the IBOR Transition Programme, BNP Paribas
BNP Paribas supports the market transition from LIBOR and is working with clients on new RFR transactions such as BMW’s largest corporate interest rate swap linked to the new risk free rate (RFR) to date.
BNP Paribas is also working closely with market participants, industry bodies and trade associations to ensure a smooth transition for clients and the industry. The steps include:
- Identifying the products which reference impacted interest rates
- Engaging with clients and counterparties on the potential consequences of the discontinuation of LIBOR
- Considering how different products may be affected
- In order to reduce our LIBOR footprint, and to assist clients, BNP Paribas is transitioning LIBOR-linked products to RFRs where relevant or appropriate
This page will be periodically updated. In the meantime, if you require any further information, please contact your usual Relationship Manager or read the below resources:
You will also find general information on interest rate reform and LIBOR transition on the following websites:
- The International Swaps and Derivatives Association
- The Financial Conduct Authority (FCA)
- The Bank of England
- The U.S. Commodity Futures and Trading Commission (CFTC),
- The Federal Reserve Bank of New York (FRBNY)
- The European Central Bank (ECB)
- The Bank of Japan (BoJ)
- The Swiss Financial Market Supervisory Authority (FINMA)
- The Monetary Authority of Singapore (MAS)
- The Financial Stability Board (FSB)
- The International Organization of Securities Commissions (IOSCO)
Below are links to useful industry/working groups’ websites where detailed information is provided on the ongoing IBOR reform: