Among the changes introduced by financial regulators around the world to create a more resilient and sound financial system is a market transition away from the Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR) and to a more robust reference rate. After 2021, the Financial Conduct Authority (FCA), a regulatory body in the United Kingdom and LIBOR regulator, will no longer require banks to submit rates that are used to construct LIBOR. With this, 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, market participants are preparing for the shift to alternative reference rates designed to overcome the fundamental weaknesses of LIBOR. On March 5, 2021, the FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:
- immediately after Dec. 31, 2021, in the case of all UK Pound, Euro, Swiss Franc and Japanese Yen settings, and the 1-week and 2-month US Dollar settings; and
- immediately after June 30, 2023, in the case of the remaining US Dollar settings.
Despite major USD LIBOR tenors having up to June 2023 to transition, regulators continue to urge market participants to stop entering into new LIBOR transactions by 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]. To facilitate the transition to alternative reference rates for derivatives, in October 2020, the International Swaps and Derivatives Association (ISDA) launched its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement to amend fallbacks in legacy and new derivatives, effective Jan. 25, 2021. AIIB is among the 13000+ market participants that have adhered to the Protocol. ISDA has separately confirmed that the "spread adjustments" to be used in its IBOR fallbacks have been fixed as of March 5, 2021, as a result of the FCA’s announcement, providing clarity on the future terms of the many derivative contracts which now incorporate these fallbacks.
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. The Asian Infrastructure Investment Bank (AIIB), to be consistent with accepted market practice, is dependent on the market reaching a conclusion on certain financial and legal matters. It is collaborating with key market players and the multilateral development bank (MDB) community to keep abreast of market developments.
AIIB will assist borrowers during the LIBOR transition process and help them navigate the transition successfully. In relation to this, AIIB has done and will continue to do the following as part of its LIBOR transition program:
- 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.
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