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Benchmark reform: Brace for LIBOR endgame
Any company or institution that has borrowed money through rate-referenced debt or has an agreement that references the LIBOR could be influenced by the benchmark reform.
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Money matters: An employee counts US dollar banknotes in a money changer in Jakarta. Bank Indonesia has decided to strengthen the Jakarta Interbank Spot Dollar Rate, a policy that will take effect on April 5. (Antara/Rivan Awal Lingga)
M
arch 5, 2021 was the momentous day on which the much-anticipated benchmark reform for regulators and financial market industry groups globally was announced. The United Kingdom Financial Conduct Authority (FCA) officially announced the detailed transition agenda from the London Interbank Offered Rate (LIBOR) or other key interbank offered rates (IBORs) toward risk-free rates (RFRs) such as the Sterling Overnight Index Average (SONIA), and its economics thereby brings more clarity. Having been used since its inception in 1986, the sunset of LIBOR has come.
The FCA marked two significant dates. The first is Dec. 31, 2021. EUR LIBOR and CHF LIBOR (all tenors), USD LIBOR (1-week and 2-month tenors), GBP LIBOR (overnight, 1-week, 2-month and 12-month tenors) and JPY LIBOR (spot next, 1-week, 2-month and 12-month tenors) are going to be permanently ceased on this date. The 1-month, 3-month and 6-month GBP LIBOR and JPY LIBOR will be deemed non-representative on the same date.
The second is June 30, 2023, on which the overnight and 12-month USD LIBOR are going toward permanent cessation, whereas the 1-, 3- and 6-month USD LIBOR will be deemed non-representative.
For laymen, the benchmark rate might be “Wall Street vernacular” that is unworthy to be discussed. But fairly, the benchmark rate reform has a greater impact than one would expect. Not only are those within arms length of the financial market (i.e., market participants) but also many far-reaching businesses are at risk of being affected.
The test is simple. One should ask whether they hold financial contracts, trade finances, deals, transaction guidelines, instruments or derivatives that reference LIBOR settings or other IBORs that are being reformed. Any company or institution that has borrowed money through rate-referenced debt or has an agreement that references the LIBOR could be influenced by the benchmark reform.
If the prong is satisfied, one should be prepared and actively transition their arrangements to the RFRs. Failure to do so before the cessation date will disrupt the relevant deals because the reference will not be available by then. For the ongoing contracts, that means a call for renegotiation and amendment.
The upcoming arrangements must also consider the FCA’s announced time frame before engaging in the LIBOR settings. Better yet, one might consider removing the LIBOR reference from their upcoming contracts as the endgame becomes closer. The smooth transition of LIBOR is also a relevant concern for many regulators across the globe, e.g., to avoid the market disruption that could affect stability and secure other LIBOR-related governmental affairs.
