IBOR reform

The transition from interbank offered rates (IBORs) to new alternative risk-free rates (RFRs) marks a historic turning point in financial markets. With cessation of LIBOR expected for the end of 2021, banks and other financial players need to focus on suitable transition planning. A large proportion of financial contracts referencing CHF LIBOR has maturity dates beyond 2021, so fallback provisions need to be high on the transition agenda of Swiss banks, to ensure contract continuity. RFRs do not include or imply any credit or term premium of the type seen in LIBOR or EURIBOR.

1. PBOR is effectively a superset of IBOR in that it is more granular and covers greater ground.
2. In a global survey conducted in June 2018 by the International Swaps and Derivatives Association (pdf) (ISDA), 87% of respondents said they were concerned about their institutions’ IBOR exposure.
3. IBORs are focused on market price and on start-of-day and even intra-day positions.
4. Another common example is a Front Office system, such as an Order Management or Portfolio Management platform, that is populated by batch-based, so-called “start-of-day” snapshots.

Note that certain non-LIBOR IBOR rates, such as EURIBOR and JPY TIBOR, are not expected to cease publication in the near term. In a global survey conducted in June 2018 by the International Swaps and Derivatives Association (pdf) (ISDA), https://traderoom.info/ 87% of respondents said they were concerned about their institutions’ IBOR exposure. But just 11% confirmed they had actually started allocating budgets to the transition, and only 12% had begun developing a preliminary project plan.

An overview of  FTSE USD IBOR Cash Fallbacks

Not so with an Investment Book of Record (IBOR) that provides up-to-date data and information all day, meaning you’re always ahead of the curve. Whatever approach is taken, implementing an IBOR solution is not an end unto itself. The real benefit comes from other systems’ use of the data, which means that any implementation needs to include significant reference to those systems as well. The use of Canadian Dollar Offered Rate (CDOR) 1-month, 2-month and 3-month settings will be prohibited for use in new derivative contracts and cash securities after 30 June 2023.

LIBOR and TIIE are banking borrowing rates, that is, the rate at which banks believe they can borrow from other financial institutions. Meanwhile, CDOR is a committed lending rate that reflects the rate at which banks are contractually willing to provide credit via a primary Bankers Acceptance loan facility. A key shared issue is that they were and are all survey-based rates based on judgment and not on specific transactions. Nordea is currently scoping IBOR-impacted contracts and assessing whether amendments may be needed to cater for IBOR discontinuation and how best to make these amendments. At the same time, various initiatives are under way to establish industry standards for ARRs.

The ARRs have been identified by various authorities and industry working groups as recommended alternatives or fallbacks for IBORs and/or in some cases it is being considered how an existing benchmark rate can be reformed in accordance with applicable regulation. For each existing IBOR and the identified ARR, the proposals of transition are at different stages and will continue to evolve. Hence, the transition is expected to happen gradually and at varying times across IBORs/ARRs (as outlined in the IBOR Transition Expectations Overview above).

Spend too much time managing data from different sources?

While new interest rate derivatives and cash markets continue referencing LIBOR, public authorities and private sector working groups have jointly selected overnight RFRs options that are being adopted by market participants. Although interbank rates served the global markets well for decades, the limitations gave rise to the creation of SOFR and the TIIE de Fondeo, as well how to use adx indicator as the strengthening of the decades old CORRA benchmark to be compliant with the IOSCO principles. First, they eliminate bank credit risk and serve as a near risk-free rate because they are collateralized by their respective government debt. Treasury securities for SOFR, Government of Canada bills and bonds for CORRA, CETES and Mexican Bonds for the TIIE de Fondeo.

They allow banks to to meet liquidity and reserve requirements, using Treasurys as collateral. SOFR comprises the weighted averages of the rates charged in these repo transactions. Libor is being phased out in large part because of the role it played in worsening the 2008 financial crisis, as well as scandals involving Libor manipulation among the rate-setting banks. It’s important to note that Libor isn’t set on what banks actually pay to borrow funds from each other. Instead, it’s based on their submissions related to what they think they would pay. As a result, it’s possible for banks to submit lower rates and manipulate Libor fairly easily.

The combination of five currencies and seven maturities led to a total of 35 different LIBOR rates calculated and reported each business day. The most commonly quoted rate is the three-month U.S. dollar rate, usually referred to as the current LIBOR rate. FTSE USD IBOR Cash Fallbacks are production benchmarks for use in financial and nonfinancial corporate contracts. Currently, most systems provide start-of-day data, which is restricted by the time-consuming manual updates and synchronizations.

Bank-Wise Fixing Q2 2020

This led to the development of different forward-looking Term RFR’s such as the 1-, 3-, 6-, 12- month CME Term SOFR and the 1-, 3- month Term CORRA. As of this writing, there are some restrictions on loan products and in the execution of derivatives referencing Term RFRs. Currently, end user clients such as corporations can obtain loans and trade derivatives for hedging cash products referencing these forward-looking rates, however, liquidity providers are restricted to hedge this risk directly in the interbank market. An ABOR is a centralized, accounting book of record that can be accessed to support various investment functions and return calculations. It supports basic back- and middle-office functions, such as generating daily net asset value data, and day-to-day fund administration, transfer agency, and custodial services, as well as client and regulatory reporting. It is critical for determining cash positions, conducting reconciliations and for closing periods.

On the Terminal, Bloomberg offers trading services in cash securities and derivatives referencing RFRs. Bloomberg also publishes term and spread adjustments for the fallbacks that ISDA has implemented for certain IBORs. Interbank offered rates (IBORs) have served for decades as the reference rate at which banks borrow in the interbank market. During the last financial crisis however, significant fraud and conspiracy connected to the rate submissions led to the London Interbank Offered Rate (LIBOR) scandal.

Deloitte AG is an affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”). Please see About Deloitte for a more detailed description of DTTL and its member firms. IBOR is extensively embedded in business and operational processes, pricing and risk models, data models, and applications. For example, Funds Transfer Pricing processes at banks commonly use LIBOR as the base rate. Firms will need to identify references to an IBOR across the entire organization, including identification and assessment of transition impact on processes, models and applications. That is why asset owners and asset managers are now using data warehouses for storing holdings and market data, among others.

Improve investment decision making with real-time positions data

For Lending products, HSBC offers SOFR in arrears, either compound or simple, in markets where we have the product capability as well as Term SOFR for those customers who prefer a rate set in advance. LIBOR and most other IBORs were intended to measure unsecured interbank lending rates and therefore included or implied an inter-bank credit premium. The ending of Interbank Offered Rates (IBORs) will likely lead to significant changes across a broad suite of financial products and markets. The content of this page reflects Credit Suisse’s current understanding of the IBOR Transition. Please note that the overview provided here is not meant to be complete nor exhaustive and does not constitute advice or recommendation. Credit Suisse will seek to update this page periodically as market developments occur and industry announcements are made.