Replacement of interest rate benchmarks
This publication is intended to provide general background information about changes to a number of reference rates. Changes to these reference rates can affect customers who use some of our banking products (for example derivatives, loans and securities). Customers should inform themselves about the changes to reference rates. If reference is made in one of your products to an interest rate benchmark(s) which is being reformed or replaced: EURIBOR, LIBOR, EONIA, SIBOR, SOR , HIBOR and/or HONIA, then this is relevant to you.
What are interest rate benchmarks?
Interest rate benchmarks are used to determine payments under a financial contract or instrument. The determination of an interest rate benchmark is outside the control of the parties to the contract or instrument. Interest rate benchmarks are essential for the smooth functioning of financial markets and are widely used by banks and other market participants. Various types of transactions use different reference rate benchmarks, but the most common are LIBOR and EURIBOR. Reference rates are used in many different contracts like floating rate notes, loans, swaps, short-term interest rate futures contracts and debt capital markets instruments, as well as homeowner mortgages.
What is happening to benchmark rates?
It is important that reference rates are robust and reliable. European legislation, in the form of the Benchmark Regulation, contains rules to ensure this and aims to improve the functioning and integrity of indices used as benchmarks. Once this legislation comes into force, banks, including Rabobank, may only use interest benchmarks if they are included in a public register intended for that purpose. To be included in this register, interest benchmarks must meet certain requirements.
Due to, EU Benchmark Regulations as well as international regulatory developments, a number of well-known and widely-used interest rate benchmark indices are expected to be reformed or discontinued. For most benchmarks that are to be discontinued, alternative rates have already been or are currently being developed.
Critical benchmarks undergoing reforms
When is the LIBOR transition happening?
There is no hard regulatory deadline attached to LIBOR transition. Regulators though are pushing for LIBOR to be replaced before the end of 2021. The FCA (regulator for the administrator of LIBOR) for instance, has publicly stated that it will no longer require banks to participate in the LIBOR panel after 2021. In practice, the transition path will be different per LIBOR currency and may conclude well ahead of the end of 2021, dependent on market adoption of the alternative rate.
Through various working groups and the Financial Stability Board’s Official Sector Steering Group (OSSG), there is international coordination on benchmark reform and the transition to alternative rates. For your reference, please find below a non-exhaustive overview of the recommended alternative rates per LIBOR currency, which reflects our understanding of the status as it stands at the time of writing this letter:
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Please refer to the FCA publication: Transition from LIBOR as well as the links to the various working groups provided below for further information.
When did this change occur?
From 1 October 2019, EONIA is derived from €STR and is published on the following Target business day (T+1) from 2 October 2019. The first publication date of both €STR and the reformed EONIA was 2 October 2019 at around 9.15 am CET.
Moreover, EONIA is now based on €STR plus an additional fixed spread of 8.5 basis points. EMMI will provide EONIA under the recalibrated methodology up to 3 January 2022, the date on which EONIA will be discontinued. This date should act as an incentive for the market to fully adopt €STR as EONIA's replacement.
For more information, please see:
- European Central Bank webpage
- ECB press release on the EONIA to €STR one-off spread calculation
- recommendations for EONIA EMMI
What is happening?
In order to become BMR compliant, the European Money Markets Institute (EMMI) EMMI has gradually implemented a new calculation methodology for EURIBOR – the so called “hybrid methodology”. This calculation method makes use of actual transactions as much as possible, while also using expert judgement for the cases where actual transactions are not available. EMMI states that EURIBOR reform “does not change EURIBOR’s Underlying Interest, which has always been seeking to measure banks’ costs of borrowing in unsecured money markets”. Consequently, EMMI states that “this reform is a clarification of the existing Underlying Interest of EURIBOR, combined with adapting a robust and BMR compliant methodology”. Early December 2019 EMMI confirmed that it has completed the phase –in of all Panel banks to the EURIBOR hybrid methodology.
Some useful links where you can find more information on the upcoming changes are set out below:
- UK Financial Conduct Authority
- European Money Markets Institute
- International Swaps and Derivatives Association
- European Central Bank
What is happening to SIBOR, SOR , HIBOR and HONIA ?
In Singapore, it is expected that SIBOR (Singapore Interbank Offered Rate) will be enhanced for cash market products subject to further international developments and SGD SOR (Swap Offer Rate) will be replaced by SORA (Singapore Overnight Rate Average) for derivatives and some cash market products.
In Hong Kong, HIBOR (Hong Kong Interbank Offered Rate) has been subject to reforms to enhance its transparency and robustness and may be subject to further reforms in the future. Reforms to HONIA (Hong Kong Dollar Overnight Index Average) as the alternative risk free rate for HIBOR, to further strengthen its representativeness are currently being considered. Presently a multiple rate approach is expected and HIBOR is expected to co-exist with HONIA.
What impact does this have on you?
Consultations are on-going and potential reforms are being considered by local regulators in Singapore and Hong Kong respectively. Rabobank is monitoring these developments closely and will reach out to you in due course if we consider any amendments to your contracts referencing such rates to be appropriate or necessary.
Are these changes an initiative of Rabobank?
No, the changes are proposed by industry-wide working groups on the recommendation of supervisors and central banks. More information and background can be found on the website of the Nederlandse Vereniging van Banken (NVB).
Are these changes only relevant for Rabobank products?
No. every contract that references an affected reference rate will be affected, whether this contract is entered into with Rabobank or another entity.
Which Rabobank customers will have to deal with changes of reference rates?
All customers who have contracts with a.o. the following benchmarks:
- EUR LIBOR
- USD LIBOR
- GBP LIBOR
- JPY LIBOR
- CHF LIBOR
What effect does this have on Rabobank customers?
Changes in benchmark rates may have consequences for financial instruments and contracts in which interest rate benchmarks are referenced. Where an interest rate benchmark is discontinued during the life of the instrument, we will have to use a modified or alternative interest rate benchmark for determining obligations under these instruments, contracts or agreements.
Rabobank is working with regulators, industry bodies and trade associations in order to facilitate a smooth transition. We will continue to update you as interest rate benchmark reforms and transitions develop. We will work with you on a bilateral basis to agree on any required changes to legal documentation to facilitate this transition. Such changes could include the addition of fall-back provisions in financial contracts to set out the alternative rate that would be applied should a benchmark cease to be available.
Pursuant to the Benchmark Regulation referred to above, Rabobank Group has robust plans available in the event that benchmarks cease to exist or change substantially. In this Fallback Plan, Rabobank Group describes its internal procedures to be followed, and actions to be taken, in the event that a benchmark changes substantially or is no longer provided. The Fallback Plan ensures that Rabobank Group investigates possible solutions, follows market practice as much as possible and carries out an impact assessment when designating an alternative benchmark that will replace a benchmark.
The Fallback Plan is periodically updated as more information becomes available. A high level version of the plan can be found here.
The Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) supervises Rabobank’s implementation of the EU Benchmark Regulation.
Any further questions?
If you have any questions please do not hesitate to contact us, preferably via your Relationship Manager.