IBOR Reform

Your Transition Away from IBOR Reference Rates

Overview

The London Interbank Offered Rate (LIBOR) and Euro Interbank Offered Rate (EURIBOR) are two of the most widely used interbank offered rates (IBOR) as interest rate benchmarks by financial markets globally. These IBORs underpin an estimated USD 350 trillion^[1]of contracts for financial products, including loans, fixed income securities, derivatives, and structured products globally. However, over the years, global regulators have expressed the need to reform IBORs and switch to alternative risk-free rates.

In July 2017, the United Kingdom’s (UK) Financial Conduct Authority (FCA) announced that it would no longer compel banks to submit the rates required to calculate LIBOR from 31 December 2021. On 5 March 2021, the FCA and the Intercontinental Exchange (ICE) Benchmark Administration (IBA) confirmed that LIBOR settings for the British pound sterling, euro, Swiss franc, Japanese yen for all tenors and, 1-week and 2-month USD settings would no longer be published after 31 December 2021, and the overnight and 1, 3, 6 and 12-month USD LIBOR settings, after 30 June 2023.^[2]

The IBOR reform is expected to change the way existing IBORs operate or in some instances, cease to exist entirely.  The changes will impact some or all of the products and services currently offered and those that may be offered in the future by the Eastern and Southern African Trade and Development Bank, its affiliates and subsidiaries (“TDB”). TDB’s main transacting currencies are USD and EUR.

Which IBORs are affected and what will replace them?

In 2014, the UK Financial Stability Board (FSC) made several recommendations identifying risk-free rates (RFRs) as credible alternative benchmarks to IBORs and began encouraging market participants to transition new contracts to an appropriate RFR, so as to make the interbank lending market sufficiently active and liquid.

Global working groups convened by regulators for the most used IBOR currencies have already converged on alternative RFRs that will replace IBORs, although different jurisdictions are at varying stages of reform. The RFRs identified address the lack of depth and liquidity of underlying transactions in IBOR determination by being based on actual transactions in underlying markets.

The working group for the USD LIBOR is the Alternative Reference Rates Committee (ARRC), which is administered by the Federal Reserve Bank of New York and has recommended the Secured Overnight Financing Rate (SOFR) to replace the USD LIBOR.

EURIBOR underwent reform in 2019 in compliance with the European Union Benchmark Regulation that will allow its continued use post 2021. For consistency however, a backward-looking overnight RFR rate, euro short-term rate (€STR) will exist alongside EURIBOR.

Summary of the key features of the USD and EURO RFR^[3]: