Interest rate benchmarks including, among others, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed.
The UK Financial Conduct Authority (FCA) has stated that after 2021 it will no longer compel banks to submit rates used for the calculation of LIBOR. This means that LIBOR is expected to be discontinued post December 2021. Regulators globally have emphasised that it is now time for market participants to start transitioning from the use of IBORs to alternative rates.
Regulatory authorities and public and private sector working groups in several jurisdictions, including the International Swaps and Derivatives Association (ISDA), the Sterling Risk-Free Rates Working Group, the Working Group on Euro Risk-Free Rates, and the Alternative Reference Rates Committee (ARRC), have been discussing alternative benchmark rates to replace the IBORs. These working groups are also considering how to support a transition to alternative rates and the development of new products referencing them.
These reforms are expected to cause some interest rate benchmarks to either perform differently to the way that they do currently or to disappear. This may impact the HSBC products and services you currently use and those we may provide in the future.
The content of this page reflects HSBC’s current understanding of the expected changes as at 28 September 2020. There still remains a high degree of uncertainty around LIBOR transition. This overview is not complete or exhaustive and does not constitute any form of advice or recommendation. Clients should contact their professional advisors on the possible implications of the changes such as financial, legal, accountancy or tax consequences.
A wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, use benchmark rates to determine interest rates and payment obligations. Benchmark rates are also used to value certain financial products and as a performance tracker for funds, among other purposes.
LIBOR, probably the most widely used benchmark, is used in financial products denominated in a number of currencies and is published in GBP (British Pound), USD (US Dollar), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc).
Certain currencies also use specific benchmarks such as EURIBOR and EONIA for EUR, the Tokyo Interbank Offered Rate (TIBOR) for JPY, the Hong Kong Interbank Offered Rate (HIBOR) for Hong Kong Dollar and the Singapore Interbank Offered Rate (SIBOR) for Singapore Dollar.
Financial regulatory authorities have expressed their concern that the interbank lending market, which IBORs are intended to reflect, is no longer sufficiently active or liquid. In particular, the regulatory concern is that the low levels of underlying activity make it “fragile and more susceptible to liquidity and amplification effects in financial markets”.
This concern has resulted in recommendations made by the Financial Stability Board (FSB) in 2014 to reform major interest rate benchmarks and use near risk-free rates (RFRs) that are based on more active and liquid overnight lending markets, instead of IBORs where appropriate.
RFRs are typically backward-looking overnight rates based on actual transactions and reflect the average of the interest rates that certain financial institutions pay to borrow overnight either on an unsecured basis from wholesale market participants for unsecured RFRs, such as the Sterling Overnight Index Average (SONIA) or the average rate paid on secured overnight repurchase or “repo” transactions for secured RFRs, such as the Secured Overnight Financing Rate (SOFR).
RFRs do not include or imply any credit or term premium of the type seen in LIBOR or EURIBOR. However, RFRs are not truly free of risk. RFRs can rise or fall as a result of changing economic conditions and central bank policy decisions.
What are the replacement benchmarks and which benchmarks are changing?
RFR working groups in a number of jurisdictions have identified replacement benchmarks and continue to develop strategies for transition. Select examples of benchmarks which are either being replaced or benchmarks where changes either have or are expected to be made to their methodology (notably the way in which they are determined) are set out in the table below.