Many financial markets have relied on Interbank Offered Rates (IBORs), the basic rate of interest used in lending between banks, as a basis for a variety of financial transactions and decisions for decades. The London Interbank Offered Rate (LIBOR), the most widely used interest rate benchmark, is reported daily in five currencies and seven tenors. The ICE Benchmark Administration (IBA) estimates LIBOR rates are used as a reference rate for approximately $350 trillion in financial instruments.
In July 2017, the U.K. Financial Conduct Authority announced it will not compel the panel banks that support LIBOR to continue their submissions beyond 2021. Regulators are encouraging market participants and financial institutions to replace existing IBOR rates with alternative reference rates (ARRs) or other benchmark rates. Since 2008, the notional amount of interbank lending based on LIBOR has declined for many reasons. This and other factors have contributed to a push by global regulators to phase out LIBOR.
In November 2020, the administrator for LIBOR, the IBA, announced it would consult on its intention to cease the publication of various LIBOR settings. The consultation concluded in January 2021 and the results published on March 5, 2021, stating that one-week and two-month USD LIBOR, as well as GBP, EUR, CHF and JPY LIBOR settings, will no longer be published after December 31, 2021. All other USD LIBOR tenors are expected to remain available until final publication on June 30, 2023.
INDUSTRY INITIATIVES TO FACILITATE TRANSITION
Together with regulatory authorities, market participants around the globe have formed National Working Groups (NWGs) to facilitate the transition to ARRs.
Below is a summary of five NWGs’ efforts to select an appropriate replacement rate for LIBOR.
| Selected Alternative Rate | SOFR (Secured Overnight Financing Rate) |
SONIA (Reformed Sterling Overnight Index Average) |
€STR (Euro Short-Term Rate) |
SARON (Swiss Average Rate Overnight) |
| Working Group | Alternative Reference Rates Committee (ARRC) | Working Group on Sterling Risk-Free Rates | Working Group on Euro Risk-Free Rates | National Working Group on Swiss Franc reference rates (NWG) |
| Administrator | Federal Reserve Bank of NY | Bank of England | European Central Bank | SIX Swiss Exchange |
| Key Features | · Fully transaction-based
· O/N · Secured |
· Fully transaction-based
· O/N · Unsecured |
· Fully transaction-based
· O/N · Unsecured |
· Based on transactions and binding quotes
· O/N |
Although a key goal of the NWGs is to minimize the potential for unintended value transfer during the move from IBORs to ARRs, these proposed ARRs are different than LIBOR and should not be considered one-for-one replacements and should take into consideration the guidance and recommendations of the NWGs. For example, ARRs are backward looking, overnight rates with different calculation methodologies, and some are secured, unlike LIBOR which is an unsecured rate. The NWGs’ efforts are aimed at addressing the differences between LIBOR and ARRs to facilitate a smooth transition, including the development of spread adjustments aimed at achieving equivalency between LIBOR and the proposed ARRs at the time of transition.
WHAT IS OSIRIS DOING?
Osiris will be undertaking a review of all relevant agreements in its portfolio which reference LIBOR and, where necessary, execute the necessary amendments to such agreements.
For more information, please contact your relationship manager.