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Global Benchmark Reform

Addressing changes coming to benchmark rates including LIBOR

Summary

You may have heard about recent and upcoming changes to benchmark reference rates, such as the London Interbank Offered Rate (LIBOR). Reference rates are utilized broadly in the construction of many financial products, including loans, floating rate notes, derivatives, and securitizations. Benchmark reform is ongoing, and Bank of America is working with global regulators, industry working groups, and trade associations on a transition to alternative reference rates.

Key Takeaways

 

  • Many benchmark reference rates – including certain settings of the London Interbank Offered Rate (LIBOR) – have ceased or changed
  • USD LIBOR is expected to cease or become non-representative immediately after June 30, 2023
  • Bank of America is working closely with global regulators and industry partners on a transition path
  • We are working with clients on the transition, taking into account client concerns
  • Additional information on the potential impact of the transition to ARRs on your investments and transactions can be found in Bank of America's IBOR Transition Statement.

Background

In July 2017, the Financial Conduct Authority (FCA), a regulatory body in the United Kingdom, announced that it would no longer require banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021.

On March 5, 2021, ICE Benchmark Administration Limited (IBA) announced its intention to cease publication of all LIBOR settings and, in response, the FCA announced a plan for the future cessation and loss of representativeness of LIBOR benchmarks.

As a result, after December 31, 2021, the following LIBOR settings ceased publication:

  • All tenors of euro (EUR) and Swiss franc (CHF);
  • Overnight, 1-week, 2-month, and 12-month British sterling (GBP);
  • Spot Next, 1-week, 2-month, and 12-month Japanese yen (JPY); and
  • 1-week and 2-month U.S. dollar (USD).

Following December 31, 2021, the 1-month, 3-month, and 6-month settings of GBP and JPY LIBOR became permanently non-representative but are being published on a synthetic basis through at least the end of 2022 to support transition of legacy contracts. Further details are discussed below.

For the remaining USD LIBOR settings, after June 30, 2023, the overnight and 12-month USD LIBOR settings are expected to cease publication, and the 1-month, 3-month, and 6-month USD LIBOR settings are expected to become permanently non-representative. Publication of 1-month, 3-month, and 6-month USD LIBOR settings on a synthetic basis after June 2023 remains subject to FCA determination.

Further, U.S. financial regulators have issued supervisory guidance encouraging supervised institutions to cease entering into new contracts referencing USD LIBOR, with certain limited exceptions with respect to market-making, hedging or risk-reducing activity related to USD LIBOR transactions executed before January 1, 2022. The FCA has issued a Notice of Prohibition to the same effect under the UK Benchmarks Regulation.

Bank of America continues its enterprise-wide initiative to identify, assess and monitor risks associated with the discontinuation or unavailability of benchmarks, including LIBOR, and the transition to alternative reference rates. We continue to evaluate existing contracts across all products to determine the impact of the discontinuation of benchmarks and to assess and implement changes to those contracts.

Bank of America is actively working with global regulators, industry working groups and trade associations to develop strategies for an effective transition to new benchmarks. For example, Bank of America supports issuance and trading in products indexed to the new Secured Overnight Financing Rate (SOFR), which is the alternative benchmark rate to USD LIBOR recommended by the Alternative Reference Rates Committee (ARRC). The ARRC is a group of private-market participants and official-sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York. SOFR is a broad measure of the cost of borrowing U.S. dollars overnight collateralized by U.S. Treasury securities.

We are working closely with our clients on the transition, taking into consideration client concerns. For further guidance on the effect of cessations or other modifications impacting LIBOR and other benchmark rates, please consult with your legal, tax, financial and other professional advisors.

LIBOR Transition Overview

What is LIBOR?

For many years, the London Interbank Offered Rate (LIBOR) has been one of the most widely used interest rate benchmarks in the world. Launched in 1969, LIBOR was first used in the syndicated loan market as a way to spread the risk of a loan across multiple lenders, using a periodic reset in the rate based on the banks’ funding costs plus a spread for credit risk. Over the last 50 years, LIBOR has become the most widely used interest-rate benchmark in the world.

The ICE Benchmark Administration (IBA) has served as the benchmark administrator for LIBOR. For those LIBOR tenors still in publication (unless being maintained only on a synthetic basis), the rates are intended to indicate the average rates at which banks could obtain wholesale, unsecured funding and are calculated based on contributions from panels of banks, one panel for each currency. For USD LIBOR, the panel of banks includes Bank of America, N.A.’s London branch, among other major banks.

Why is LIBOR being discontinued?

Since the 2008 financial crisis, the robustness of LIBOR as a benchmark of banks funding costs has been called into question, leading to the creation of alternative reference rates (ARRs) in several of the major currencies to enable a transition away from LIBOR. The UK’s Financial Conduct Authority (FCA), which has supervisory oversight over the administration of LIBOR, announced in July 2017 that it would no longer compel LIBOR panel banks to submit rates for LIBOR after 2021.

What is the impact of LIBOR cessation and non-representativeness?

With respect to contracts or products that reference LIBOR, LIBOR cessation or non-representativeness may impact such contracts or products, including with respect to the fixing of certain spread adjustments and the date on which the replacement rate under such contract or product may become effective.

For derivatives and other relevant products and for all 35 LIBOR settings, (i) the FCA’s March 5, 2021 announcement on LIBOR cessation and non-representativeness constitutes an “Index Cessation Event” for the purposes of and as defined in each of the Attachment to the ISDA 2020 IBOR Fallbacks Protocol and Supplement 70 to the 2006 ISDA Definitions; and (ii) March 5, 2021 constitutes a “Spread Adjustment Fixing Date” under the Bloomberg IBOR Fallback Rate Adjustments Rule Book.

For the avoidance of doubt, each relevant LIBOR-linked contract and product may transition to a replacement rate (e.g., based on Secured Overnight Financing Rate [SOFR] or Sterling Overnight Interbank Average Rate [SONIA]) in accordance with the terms and fallback provisions (if any) contained therein, and publication of the announcement does not automatically transition such contracts and products to the replacement rate as of the date of the announcement. Also, circumstances could change that could impact the timing and other information described herein.

Lastly, the 1-month, 3-month, and 6-month GBP and JPY LIBOR settings are being published by the IBA on a non-representative, synthetic basis until the end of 2022.  The FCA has stated that synthetic JPY LIBOR will not be published after year-end 2022. Continued publication of synthetic GBP LIBOR will be reassessed annually by the FCA.

The methodology by which IBA is required to calculate these synthetic rates is as follows: the forward-looking term versions of the relevant risk-free rate (i.e., the ICE Term SONIA Reference Rates provided by IBA for GBP, and the Tokyo Term Risk Free Rates [TORF] provided by QUICK Benchmarks Inc., adjusted to be on a 360 day count basis, for JPY), plus the respective ISDA fixed spread adjustment (as published for the purpose of ISDA’s IBOR Fallbacks for those six settings).

The FCA has made it clear that the use of synthetic GBP or JPY LIBOR is only to assist holders of legacy contracts that are challenging to modify (often referred to as “tough legacy” contracts) in transitioning away from the above six settings. 

Consistent with this and regulatory expectations more generally, Bank of America’s priority has been to focus on active transition away from LIBOR where possible, rather than relying on synthetic GBP or JPY LIBOR. Further, the FCA’s authority to mandate publication of synthetic GBP or JPY LIBOR is temporary. Accordingly, should a contract or product utilize synthetic GBP or JPY LIBOR, such contract or product will still need to transition to an ARR.

Further, in the U.S., a federal law has been passed to aid transition efforts with respect to U.S. law-governed tough legacy contracts through a statutory replacement of USD LIBOR to a SOFR-based replacement rate. The EU and the UK have adopted similar legislation. Bank of America continues to monitor such legislative developments.

What is LIBOR transitioning to?

The following chart provides ARRs that various working groups have identified and recommended across five major jurisdictions as alternatives to LIBOR.

5 major jurisdictions

  USA
USA flag
UK
USA flag
Europe
USA flag
Switzerland
USA flag
Japan
USA flag
Alternative Reference Rate Secured Overnight Financing Rate (SOFR) Sterling Overnight Interbank Average Rate (SONIA) Euro Short-Term Rate (€STR) Swiss Average Overnight Rate (SARON) Tokyo Overnight Average Rate (TONAR)
Replacement For USD LIBOR GBP LIBOR EURIBOR, Euro LIBOR CHF LIBOR JPY LIBOR, JPY TIBOR, EUROYEN TIBOR
Working Group Alternative Reference Rate Committee (ARRC) Working Group on Sterling Risk-Free Rates Working Group on Risk-Free Rates for Euro Area National Working Group on Swiss Franc Reference Rates Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
Administrator Federal Reserve Bank of New York Bank of England European Central Bank SIX Swiss Exchange Bank of Japan
Secured Yes No No Yes No
Methodology Fully Transaction based Fully Transaction based Fully Transaction based Transaction and binding quotes-based Fully Transaction based
Go Live Date April 3, 2018 April 23, 2018 (originally introduced in March 1997) October 2, 2019 Published since 2009 Published since 1992
Terms Rate Availability Live since April 2021 (via CME). ARRC formally recommended CME’s Term SOFR on July 29, 2021. Live since January 2021 (via ICE BA, Refinitiv).
Regulators recommend use of compound SONIA in most cases.
 
WG recommended OIS quotes based methodology for forward term rate. €STR Term rate anticipated in 2022. Use of compound SARON recommended – robust term rate seen as unlikely Live since April 2021 (‘TOFR’ via Quick)

Changes are also occurring in other jurisdictions, including Australia, Canada, Hong Kong, and Singapore.

5 major jurisdictions

  USA
USA flag
Alternative Reference Rate Secured Overnight Financing Rate (SOFR)
Replacement For USD LIBOR
Working Group Alternative Reference Rate Committee (ARRC)
Administrator Federal Reserve Bank of New York
Secured Yes
Methodology Fully Transaction based
Go Live Date April 3, 2018
Terms Rate Availability Live since April 2021 (via CME). ARRC formally recommended CME’s Term SOFR on July 29, 2021.
  UK
UK flag
Alternative Reference Rate Sterling Overnight Interbank Average Rate (SONIA)
Replacement For GDP LIBOR
Working Group Working Group on Sterling Risk-Free Rates
Administrator Bank of England
Secured No
Methodology Fully Transaction based
Go Live Date April 23, 2018 (originally introduced in March 1997)
Terms Rate Availability Live since January 2021 (via ICE BA, Refinitiv).
Regulators recommend use of compound SONIA in most cases.
  Europe
Europe flag
Alternative Reference Rate Euro Short-Term Rate(€STR)
Replacement For EURIBOR, Euro LIBOR
Working Group Working Group on Risk-Free Rates for Euro Area
Administrator European Central Bank
Secured No
Methodology Fully Transaction based
Go Live Date October 2, 2019
Terms Rate Availability WG recommended OIS quotes based methodology for forward term rate. €STR Term rate anticipated in 2022.
  Switzerland
Switzerland flag
Alternative Reference Rate Swiss Average Overnight Rate(SARON)
Replacement For CHF LIBOR
Working Group National Working Group on Swiss Franc Reference Rates
Administrator SIX Swiss Exchange
Secured Yes
Methodology Transaction and binding quotes-based
Go Live Date Published since 2009
Terms Rate Availability Use of compound SARON recommended – robust term rate seen as unlikely
  Japan
Japan flag
Alternative Reference Rate Tokyo Overnight Average Rate (TONAR)
Replacement For JPY LIBOR, JPY TIBOR, EUROYENTIBOR
Working Group Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
Administrator Bank of Japan
Secured No
Methodology Fully Transaction based
Go Live Date Published since 1992
Terms Rate Availability Live since April 2021 (‘TOFR’ via Quick)
Changes are also occurring in other jurisdictions, including Australia, Canada, Hong Kong, and Singapore.

At present, LIBOR and ARRs are not equivalent rates as they utilize different underlying transactions and methodologies in their construction.

In the US, in addition to SOFR, credit-sensitive rates have become available in the market as an alternative to USD LIBOR, including the Bloomberg Short-Term Bank Yield Index (BSBY) and the American Interbank Offered Rate (AMERIBOR®).

What is the transition timeline?

The industry has already passed a key milestone: the end of the CHF, EUR, GBP, and JPY LIBOR settings at the end of 2021. While most USD LIBOR settings will continue to be published until June 30, 2023, U.S. banking regulators have issued supervisory guidance encouraging banks to cease entering into new contracts after December 31, 2021 that use USD LIBOR as a reference rate, subject to certain limited exclusions to generally support market-making, hedging or risk-reducing activity related to USD LIBOR transactions executed before January 1, 2022. Regulators in other jurisdictions, including the FCA in the UK, have also issued guidance or rules regarding their expectations on the prohibition of new USD LIBOR activity after the end of 2021, consistent with the U.S. regulatory guidance.

How does the transition impact our clients?

For financial products referencing LIBOR, the impact can vary across different types of products, and even between transactions in the same type of product. Additionally, LIBOR currencies and tenors have been or will be discontinued on differing schedules. 

It is important that clients review and understand the governing terms of their financial products. Clients should analyze the effect of cessation or other modifications impacting LIBOR and other benchmark rates.

Some financial products that may be impacted by benchmark reform include:

  • Loans
  • Mortgages
  • OTC Derivatives
  • Exchange-Traded Derivatives
  • Securitizations
  • Floating Rate Notes (FRNs)

This list is indicative and not fully exhaustive. Other financial products may also be affected indirectly due to changes in discounting curves or pricing.

For guidance on how to prepare for the cessation of USD LIBOR and the possibility that other benchmark rates may be discontinued or materially change, please consult with your legal, tax, financial and other professional advisors.

How is Bank of America assisting its clients?

Bank of America is working closely with our clients to promote awareness of these changes, take into consideration client concerns, support markets, and provide solutions to our clients. Bank of America is participating in the work of global regulators, industry working groups, and trade associations aimed at supporting a smooth transition away from current benchmarks to ARRs.

Other Resources

More information can be found in Bank of America’s most recent Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission. Additional information on the potential impact of the transition to ARRs on your investments and transactions can be found in Bank of America’s IBOR Transition Statement. Below are additional resources on benchmark reform and the IBOR transition in addition to the Bloomberg Short Term Bank Yield Index (BSBY).

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