IBORs such as LIBOR have been reformed, or are in the process of being reformed.
LIBOR
A number of LIBOR rates either ceased to be published or representative as of 31 December 2021.
LIBOR was historically one of the most widely used IBORs in financial markets, and previously quoted for five currencies (USD, GBP, CHF, JPY and EUR) in seven tenors (overnight, one week, and one, two, three, six and 12 months). It was commonly used in financial arrangements, including loans, derivative (including hedging) arrangements, internal pricing and other financial arrangements.
On 5 March 2021, the FCA formally announced that all LIBOR settings for all currencies will either cease to be provided by any administrator or no longer be representative immediately after the following dates:Footnote1
- 31 December 2021 for all GBP, EUR, CHF and JPY LIBOR settings in all tenors (overnight, one week, and one, two, three, six and 12 months), and USD LIBOR one-week and two-month settings
- 30 June 2023 for USD LIBOR overnight and one, three, six and 12-month settings.
To avoid disruption to financial markets, the FCA has also confirmedFootnote2 that it will require the continued publication of certain LIBOR settings for the duration of 2022 on a ‘synthetic’ basis for certain legacy contracts.
In Australia, financial regulators have strongly encouraged financial market participants to prepare for the transition away from LIBOR; for example, by adopting alternative RFRs that is best suited to each product and service and appropriate to their clients’ need for financing or hedging strategies and including robust fallback clauses in existing contracts.Footnote3 In this regard, ASIC (with the support of APRA and the RBA) has strongly advised Australian financial and corporate institutions to adhere to the 2020 IBOR Fallbacks Protocol and associated Supplement released on 23 October 2020.Footnote4
For certain currencies, other local IBOR benchmarks are used such as EURIBOR and EONIA for EUR, and the Tokyo Interbank Offered Rate (TIBOR) for JPY. These IBORs are also being reformed, for example, via improvements to their calculation methodology, or alternatively replacement with alternate RFRs.
Australian benchmark reform
For the Australian dollar (AUD), the key interest rate benchmarks are the Bank Bill Swap Rates (BBSW) and the RBA Inter-bank Overnight Cash Rate (Cash Rate or AUD Overnight Index Average (AONIA)). The BBSW is a credit-based short-term interest rate used as a benchmark for the pricing of the AUD derivatives and securities, while AONIA is the interest rate on unsecured overnight loans between banks and is considered the RFR for the AUD.
Reforms have also been undertaken to enhance the robustness of these benchmarks, including changes in recent years to strengthen the methodology underlying the benchmark calculation of the BBSW.External Link Accordingly, the RBA has indicated that regulators in Australia will be facilitating a ‘multi-rate’ approach, where Australia’s local credit-based benchmark (the BBSW) will co-exist with Australia’s RFR (AONIA) as the key benchmarks for the AUD.
Inter-bank Offered Rates (IBOR), such as the London Inter-bank Offered rate, are in the process of being reformed.- Footnote 1
- FCA 2021, Announcements on the end of LIBOR, press release, 5 March.
- Footnote 2
- FCA 2021, Further arrangements for the orderly wind-down of LIBOR at end-2021, press release, 29 September.
- Footnote 3
- Australian Prudential Regulation Authority (APRA), Australian Securities and Investments Commission (ASIC) and Reserve Bank of Australia (RBA) 2020, Regulators Release Feedback on Financial Institutions' Preparation for LIBOR Transition, joint media release, Sydney, 8 April.
- Footnote 4
- APRA, ASIC and RBA 2020, Regulators urge Australian institutions to adhere to the ISDA IBOR Fallbacks Protocol and Supplement, joint media release, Sydney, 13 October.