Financial regulators around the world have recently introduced many changes to create a more resilient and sound financial system. The Financial Conduct Authority (FCA), a regulatory body in the United Kingdom and regulator of the London Interbank Offered Rate (LIBOR), has called for a market transition away from LIBOR and to a more robust reference rate. After 2021, FCA will no longer require banks to submit rates that are used to construct LIBOR. Therefore, it is expected that LIBOR will no longer exist or will cease to be useful as a reference rate for financial products such as loans and derivatives.
In response, alternative reference rates designed to overcome the fundamental weaknesses of LIBOR have been identified. Time is now of the essence for market participants to prepare for a shift to new rates before the cessation at the end of 2021. The transition away from LIBOR as a benchmark rate is underway with replacement reference rates beginning to take hold (such as the Secured Overnight Financing Rate (SOFR) for US dollar products and the euro short-term rate (€STR) for euro products).
While there are tangible developments, financial markets have not yet settled on a single set of terms for many post-LIBOR products, and there are technical issues that present challenges, particularly to borrowers. Because the Asian Infrastructure Investment Bank (AIIB) needs to be consistent with accepted market practice, the Bank is dependent on the market reaching a conclusion on certain financial and legal matters. Developments are closely tracked, and AIIB will communicate outcomes as early as possible.
AIIB will continue to collaborate with key market players and the multilateral development bank (MDB) community to keep abreast of market developments. The Bank will assist borrowers during this process, helping them navigate the transitions successfully. Here we summarize work that has begun and continues:
- In December 2019, AIIB formalized efforts to replace LIBOR as a reference rate by establishing a project and setting up a steering group led by the Bank’s Chief Financial Officer. A plan is in place and on track to complete the transition by the end of 2021, including changes to our product lineup and contractual changes for existing borrowers.
- AIIB will communicate with stakeholders during the transition period, sharing information in a variety of ways. Updates will be linked on the AIIB website, events for borrowers will be organized and outreach with every borrower on a loan-by-loan basis will be conducted to address specific issues. At every step, the Bank will appreciate borrowers’ direct feedback.
- AIIB remains informed of how MDBs are approaching the challenge and the Bank advocates for harmonization with peer banks in the interest of our clients.
Answers to Frequently Asked Questions will be posted here soon. For queries on AIIB’s LIBOR transition effort, please contact us at LIBORtransition@aiib.org.
General information about the background for financial benchmark reform and materials from regulators and key participants in the replacement of LIBOR can be found here:
Regulators and Standard Setters:
New York Fed, Alternative Reference Rates Committee (ARRC)
ARRC Final Recommended Loan Language, June 30, 2020
European Central Bank (administrator of ESTR)
European money market institute (administrator of Euribor and Eonia)
Bank of England’s working group
IOSCO Principles for financial benchmarks
Loan Markets Association (LMA)
Bond markets: International Capital Markets Association (ICMA) on LIBOR reform
Derivatives markets: International Swaps and Derivatives Association (ISDA)
https://www.isda.org/ and Bloomberg (commissioned by ISDA to publish data): https://www.bloomberg.com/professional/solution/libor-transition/
Association of Corporate Treasurers (ACT):
JPMorgan Leaving LIBOR microsite https://www.jpmorgan.com/global/markets/leaving-libor?source=cib_em_ee_oftlibor0601