LIBOR, the much-criticized London Inter-bank Offered Rate, is finally being replaced by different interbank overnight lending rate (IBOR) benchmarks. In this blog post, we share the global timelines for its replacement and six areas of your business which could be affected.
What’s changing and where?
Some updates or replacements to LIBOR are already in place now, others will come in by the end of 2019 and some as late as 2021:
- Canada – CORRA (Canadian Overnight Repo Rate Average) by end of 2019 transition plans expected as well as definition of a Canadian term risk free rate
- USA – SOFR (Standard Overnight Finance Rate) in place for some products, rest by end of 2019 especially alternative based on futures data
- UK – SONIA (Sterling Overnight Indexed Average) in place by end of 2019 for FRNs, loans, bonds, as well as term benchmark rate in production and fallback language created, also need to move off all LIBOR by 2021
- EU – ESTER (European Short-Term Rate) – while delay announced, driven by liquidity concerns, overnight index swaps expected by end of 202
- Switzerland – SARON (Swiss Average Overnight Rate) in place for some products, rest planned by end of 2019, esp. derivatives
- Japan – TONAR (Tokyo Overnight Exchange Rate) – expected to replace TIBOR by end of 2021
- Hong Kong – HONIA (Hong Kong Overnight Index Average – standard setters consulting industry re timelines, rate tenures and structures, expect to follow behind UK SONIA changes
Six challenges for businesses
Most financial institutions have developed internal programs to address the changes and are participants in working groups with standard setters seeking to establish the new IBOR benchmarks – both term and risk-free rate standards. Is your organization prepared to navigate these six challenges as part of a properly managed program of work?
- Product management – changes to existing products and potentially introducing new more extensive products.
- Client management – analyze current and future client needs – align to revised products, develop client specific communications strategies including timelines, negotiate new contracts, provide education internally, new/changed disclosures.
- Valuations and risk management – changes impact market valuations, models, discounting calculations, hedging, and adjustments for risk-free vs. alternative rates.
- Existing contracts – understanding what’s in place, when and how to amend, including defined fallback provisions and valuations, as well as new disclosures.
- Operations and technology – changes to processes within impacted lines of business (capital markets, retail/commercial banking, wealth management), from trade capture through to settlement, including systems, reference data, capital, reporting, controls, and other operational procedures.
- Accounting and tax - changes in the amount of taxes due or acceleration of payments on financial contracts or tax structures, fair value designation, financial reporting, hedge accounting, and inter-affiliate accounting structures.
Read more about The New World of IBOR Alternatives Rates here.