Preparing for transition from LIBOR to risk free rates
Global regulators are concerned about the robustness of benchmark interest rates such as LIBOR and expect market participants to plan for no LIBOR publication after the end of 2021.
Over the last few years, regulators around the globe have been engaging with the financial services industry to transition markets from IBOR based interest calculations to Risk Free Rates. This is being completed under a framework set out by the Financial Stability Board (an organisation made up of the world’s largest central banks and regulators).
A key focus of these reforms is to ensure that widely used benchmarks are credible and robust. Regulators have been clear that this means benchmarks should be based upon transactions to the greatest extent possible. Perhaps the most commonly known of these benchmarks is LIBOR, which is referenced by trillions of dollars’ worth of financial products, used for calculating interest payments on bonds, loans and mortgages.
On the 5 March, 2021, the Financial Conduct Authority (FCA) made an announcement confirming that all LIBOR settings will either cease to be published by an administrator or be provided on a representative basis in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings immediately after 31 December 2021. The same will apply to the remaining US dollar settings after 30 June 2023.
Please be aware that the United Kingdom’s Financial Conduct Authority (FCA) published an announcement on 5 March 2021 on the future cessation and loss of representativeness of LIBOR benchmarks. The announcement follows the completion of the ICE Benchmark Administration Limited (IBA) consultation on its intention to cease publication of LIBOR in its various currency-tenor settings as the administrator of LIBOR.
The FCA’s announcement confirms that all LIBOR settings will either cease to be published by an administrator or be provided on a representative basis in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings immediately after 31 December 2021. The same will apply to the remaining US dollar settings after 30 June 2023.
The key aspects of the announcement are:
Immediately after December 31, 2021:
Immediately after June 30, 2023:
The FCA will consult in Q2 2021 on using proposed new powers that the United Kingdom government is potentially legislating to grant to it under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis after the end of 2021 for
The FCA also indicated it will consider the case for continued publication of US dollar 1, 3 and 6 month settings taking into account the views and evidence from US authorities and other stakeholders.
Furthermore, the FCA has advised that it has no intention of using its proposed new powers to require the IBA to continue the publication of any euro or Swiss franc LIBOR settings, or the overnight/spot Next, 1 Week, 2 Month and 12 Month LIBOR settings in any other currency, beyond the above intended cessation dates for such settings.
The proposed new powers are to allow the FCA to impose changes to the calculation methodology of a designated LIBOR setting and require the IBA to publish such LIBOR setting based on that amended methodology (‘synthetic’ LIBOR). Any synthetic LIBOR will no longer be representative of the underlying market and is therefore not intended to be used for new business, instead it is intended to support instances where removing a LIBOR setting from a product or service is not easily achieved ahead of the LIBOR settings ceasing (“tough legacy” contracts). In its consultation, the FCA will consider which legacy contracts will be permitted to use any ‘synthetic’ LIBOR setting.
The importance of the FCA’s announcement in the transition away from LIBOR has been emphasized by the Bank of England, the ARRC (Alternative Reference Rates Committee) convened by the US Federal Reserve Board and the New York Federal Reserve, the Bank of Japan and the IBA, amongst others.
Potential product specific impacts
ISDA has confirmed that the FCA announcement constitutes an index cessation event under the ISDA IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol. The fallback spread adjustments published by Bloomberg are fixed as at the date of the announcement for all 35 LIBOR currency-tenor settings.
The fallback rates and spreads will be applied to outstanding derivatives transactions, covered by the Supplement and/or Protocol, when the relevant LIBOR setting ceases to be published or ceases to be representative.
The majority of LIBOR-linked loan contracts that expire after 2021 will need to be amended before LIBOR cessation to facilitate transition from LIBOR to an appropriate alternative rate. This may require an amendment to any existing terms and conditions which may in turn require the completion of updated agreements.
The impacts of the FCA’s announcement on cash products will depend on the terms contained within the relevant documentation; the fall-back provisions can vary widely in such contracts:
This information on product impact is not exhaustive; in addition, there may be implications for other products and services you may hold that are not covered by the above product information.
Barclays is not able to provide legal, financial and/or tax advice. You should seek independent legal, financial and/or tax advice in order to ascertain what the FCA announcement means for you and the LIBOR referencing products and services you may have exposure to.
On 23rd October 2020, ISDA launched a supplement (the “Supplement”) amending the 2006 ISDA Definitions to include new IBOR fallbacks. The Supplement will come into effect on 25th January 2021 and will be automatically incorporated into any new derivatives transaction which incorporates the 2006 ISDA Definitions entered into on or after 25th January 2021.
The IBOR Protocol was also launched on 23rd October 2020 to enable market participants to incorporate IBOR fallbacks into legacy non-cleared derivatives transactions. The IBOR Protocol will also be effective from 25th January 2021. Market participants who adhere to the IBOR Protocol agree, as between adhering parties, their legacy derivatives (and certain non-derivatives contracts i.e. securities financing transactions, that are within the scope of the IBOR Protocol) will be amended to include the relevant fallbacks.
Whilst the IBOR Protocol will apply to non-cleared derivatives transactions, for legacy cleared derivatives transactions certain CCPs have indicated they will use the powers in their rule books to implement the same fallbacks as of the effective date of the Supplement/IBOR Protocol.
ISDA has produced a factsheet, a FAQ and brochure with further information on IBOR transition. Bloomberg has also published a factsheet, rule book and technical note with further information on the implementation of fallbacks and the calculation of near risk-free rates.
Further information and updates can be found on the ISDA website
We have also drafted our own FAQ document on the Protocol and further information on our adherence.
Barclays has adhered to the IBOR Protocol for its major derivative trading entities (The list of all adhering entities (including Barclays entities) can be found on the ISDA website here)). If you also decide to adhere to the IBOR Protocol, legacy transactions you have with us that are within the scope of the IBOR Protocol will be amended in accordance with the IBOR Protocol. As the IBOR Protocol does not include all benchmarks in its scope, the consequences of discontinuation of any benchmark outside the IBOR Protocol (e.g., CMS, ICE Swap Rate, EONIA) are unpredictable, and your transactions may be adversely impacted. You need to make your own decision as to whether to adhere to the IBOR Protocol based on your individual circumstances, including your IBOR-linked exposures, and assess the potential risks of adhering versus not adhering, in each case either on your own or through independent professional advisors (legal, accounting, financial, tax, or other), as appropriate. This should include evaluation of the changes introduced by the IBOR Protocol including the consequences of a change in interest rate methodology and the impact of the non-representativeness or discontinuation of any IBOR referenced in your transactions. You must satisfy yourself as to the appropriateness or suitability of adhering to the IBOR Protocol and any possible adverse outcome therefrom (including current IBOR transactions ceasing to function as originally intended in respect of certain non-linear products after fallback rates become effective and any potential transfer of economic value). Barclays accepts no responsibility or liability for, and makes no representation or warranty, express or implied, as to, any such risks or consequences. Barclays is not acting as your fiduciary or advisor and is not responsible for assessing the appropriateness or suitability for you of adhering to the IBOR Protocol.
In February 2021, the Bank of England released an updated version of their Working Group on Sterling Risk-Free Reference Rates (RFRWG) roadmap, recommending the the following Key Milestones for Markets in 2021.
End Q1 2021
The RFRWG’s key expectation is for any new business in GBP LIBOR-linked linear derivatives after 31 March 2021 to be based on SONIA.
However, the RFRWG does recognise there will be ‘limited circumstances’ where it may be appropriate to transact new GBP LIBOR-linked linear derivative contracts expiring after end 2021. These circumstances generally pertain to risk management of existing positions and are listed in the RFRWG’s publication. Exceptions are expected to be kept to a prudent minimum.
End Q2 2021
*except for risk management of existing positions
At the end of July, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) issued a statement informing market participants of the additional materials they have produced to assist firms in progressing their LIBOR transition plans. Tushar Morzaria, Barclays Group Finance Director and Chair of the RFRWG said “Transition from LIBOR in sterling markets continues at pace. Today’s publications are designed to further support firms that have transition plans in place as well as corporates and end-users, for whom focus on transition is also crucial this year. I am encouraged by the continued progress and efforts in sterling markets and look forward to the RFRWG continuing to provide leadership in the sterling market transition from LIBOR by end 2021”. The RFRWG’s top level priorities for 2020-21are:
In addition, on 28 September 2020, The Bank of England and FCA have published a statement encouraging liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR from 27 October 2020. The statement is accessible at these locations:
Following the endorsement of this proposal by the Working Group at its 16 September 2020 meeting, this has also been added to its roadmap to help progress transition in the derivatives market:
Industry Update on “SOFR First” Initiative
The “SOFR First” Initiative represents a prioritization of interdealer trading in the Secured Overnight Financing Rate (SOFR) rather than USD LIBOR. This initiative, which is endorsed by the United States Alternative Reference Rates Committee (ARRC), will contribute to the transition away from USD LIBOR for derivatives and related contracts.
“SOFR First” recommendations are focused on the interdealer market only, and therefore do not impact availability of USD LIBOR linear swaps in dealer-to-client transactions
Key Timelines associated with “SOFR First”
On 26 July 2021
Interdealer brokers replace trading of USD LIBOR linear swaps (outright swaps, swap spreads and curve trades) with trading of SOFR linear swaps.
After 22 October 2021
Interdealer broker screens for USD LIBOR linear swaps should be turned off altogether
By 31 December 2021
Market participants should cease to enter new contracts that use USD LIBOR as soon as practicable and in any event by December 31, 2021
The UK Financial Conduct Authority (FCA) and the Bank of England (BoE) have made a statement supporting and encouraging all participants in the interdealer USD interest rate swaps market to take the steps necessary to prepare for and implement these changes to market conventions on July 26, 2021 and shift liquidity away from USD LIBOR to SOFR.
Additional information on the “SOFR First” Initiative can also be found in the FAQs published by CFTC.
ARRC Best Practices
The Alternative Reference Rates Committee (ARRC) published a set of recommended best practices to prepare for the cessation of USD LIBOR by the end of 2021. These recommendations include proposed target dates for the incorporation of fallback reference rates, operational readiness, and the cessation of USD LIBOR products, while recognising differences between markets.
The Euro Overnight Index Average (“EONIA”) became increasingly fragile in recent years due to low volumes and the decline of panel banks members. Consequently, based on the recommendation from the EUR RFR Working Group, the methodology and publication time (e.g. moved to T+1) were changed and since October 2019, EONIA became a tracker rate to the Euro Short-Term Rate (“€STR”), the risk-free rate selected by the EUR RFR Working Group, and is now equal to €STR + a fixed spread of 8.5 bps. €STR will replace EONIA on 3 January 2022 when EONIA is scheduled to be discontinued.
No potential cessation date has been set for EURO Interbank Offered Rate (“EURIBOR”) which completed reforms of its methodology in Q4 2019. The European authorities believe reformed EURIBOR can exist beyond 2021 and no indication has been given that EURIBOR is likely to cease anytime soon.
Key CCPs switched PAI and discounting on cleared EUR-denominated IRS products to €STR (from EONIA) on July 25/26 2020. The discounting transition however has not resulted in an increased volume in €STR trading to date as the market continues to use EONIA, causing concern in the official sector given EONIA’s end date is just over a year away.
The EUR RFR WG has since published responses to public consultations on EURIBOR Fallback Trigger Events and Fallback Rates, as well as subsequent recommendations, which can be found here.
EONIA Collateral Agreement Fallbacks Protocol
The International Swaps and Derivatives Association, Inc. (“ISDA”) published their 2021 EONIA Collateral Agreement Fallbacks Protocol on 18 August 2021. This offers market participants who hold certain ISDA Collateral Agreements (including Credit Support Annexes) an efficient and effective way to amend the terms of these agreements to incorporate a fallback to €STR Modified upon the cessation of EONIA.
LIBOR-linked products in the JPY market are due to transition to the new benchmark rate TONA (Tokyo OverNight Average).
The JPY RFR Working Group, part of the Bank of Japan (BoJ), released an announcement in late July on TONA First go-live dates and scope of products. It recommended that JPY Interest Rate Swaps (IRS) linear products, carried out in the interbank market via voice brokers, should be ceased altogether after 30 July, 2021.
Discussions continue with regard to the cessation date of JPY LIBOR swaps (non-linear products) in the interbank market via voice brokers with reference to the initiatives for JPY LIBOR swaps (linear products).
All market participants are expected to cease trading JPY IRS by 30 September, 2021, based on the industry milestone.
Please see links below for more details.
(Further updates and information will be published on this website when they become available)
LIBOR-linked products in the CHF market are due to transition to the new benchmark rate SARON (Swiss Average Rate OverNight).
The Swiss National Bank (SNB) noted that, as of May 2021, turnover in the CHF swap market was 60% SARON-based. In order to promote a smooth transition to SARON in CHF Markets, the National Working Group (NWG) for Swiss France Reference Rates (part of SNB) recommended the use of only SARON-based derivatives for new transactions starting from 1 July 2021, excluding transactions that reduce or hedge LIBOR exposures. In addition, they recommended that all market participants (investors and issuers) should switch to the SARON swap curve as the only pricing reference starting 1 September 2021, at the latest.
For further information, please refer to this document , published by the SNB. (Further updates and information will be published on this website when they become available)
Despite reforms in the governance and submission methodology of LIBOR, which now anchor the benchmark in ‘transactions to the greatest extent possible’, few transactions in the short-term money market actually occur now as banks have changed the way they fund themselves. Regulatory measures implemented after the 2008 financial crisis, to strengthen banks’ balance sheets, have reduced the utility of unsecured interbank borrowing in the money markets. LIBOR submissions are based upon these same transactions.
Global regulators formed currency-specific working groups to assess market conditions, examine alternatives and consider next steps. Members of these working groups include banks, asset managers, insurance companies, and corporates. Industry bodies and trade associations representing various segments of the market are also actively engaged.
These efforts have resulted in the identification of Risk-Free-Rates (RFRs), for each of the LIBOR currencies, which are based upon overnight transactions; however, these are not the only identified alternatives. While it is expected that RFRs will become the norm for derivatives, securities and wholesale loans, regulators have highlighted the usage of other variable rates or fixed rates for some market participants. An example of this in the UK, is the Bank of England Bank Rate, which is already widely used in mortgages and for some retail lending where simplicity and transparency of the rate are seen as priority.
|Currency||Existing Rate||Alternative Rate||Transaction Type|
|USD||LIBOR||SOFR, Secured overnight financing rate||Secured|
|EUR*||LIBOR, EURIBOR||€STR, Euro short term rate||Unsecured|
|GBP||LIBOR||SONIA, Sterling overnight index average||Unsecured|
|JPY||LIBOR||TONA, Tokyo overnight average||Unsecured|
|CHF||LIBOR||SARON, Swiss average rate overnight||Secured|
For information on other key jurisdictions please download our world map (PDF 315KB)
The Euro Short Term Rate (“€STR”) is intended to replace the Euro Overnight Index Average (“EONIA”), at the end of 2021. No potential cessation date has been given for EURIBOR.
What is happening with EURIBOR & EONIA?
EURIBOR, (EURO Interbank Offered Rate) completed reforms of its methodology in Q4 2019. The European authorities believe reformed EURIBOR can exist beyond 2021, and no indication has been given that the benchmark is likely to cease anytime soon. However, EONIA, the Euro Overnight Index Average, became increasingly fragile in recent years. Consequently, the methodology was changed in October 2019 and EONIA became a tracker rate to €STR, the RFR identified by the Euro working group. It is expected publication of EONIA will cease on 3 January 2022.
The acronym “RFR” was introduced by the Financial Stability Board in their 22 July 2014 publication on benchmark interest rate reform. The phrases ‘near risk-free rates’, ‘risk-free rates’ and ‘alternative reference rates’ are generally accepted as interchangeable and these should be considered to refer to the same: reference rates which are being developed by international, central bank led working groups as alternatives to LIBOR.
RFRs have a number of differences when compared to LIBOR, including:
The interbank markets allow banks to borrow wholesale deposits from other banks over a shorter term at a relatively low cost compared to bond or equity funding.
Before the financial crisis of 2008-09, the IBOR markets were deep and liquid sources of interbank funding. A stark feature of the financial crisis was the demise of a number of financial institutions that had previously been considered robust; a catalytic factor was the inability to rollover short-term deposits once market confidence in an institution had been lost.
The post-crisis regulatory response, a suite of directives that came to be known as Basel III, attempted to address the root causes of the crisis by, amongst other things, reducing banks’ reliance on short-term funding. Less short-term, interbank funding would mean less systemic risk and therefore less risk of contagion in any future crisis.
The amount of liquidity in the IBOR markets subsequently fell as banks responded to Basel III by moving their funding structures to longer-term instruments.
The Wheatley Review
One consequence of this falling liquidity was the opportunity for manipulation. This was the subject of the 2012 Wheatley Review, which brought a greater regulatory overview to the LIBOR markets. It reduced the number of currency and tenor points that banks were required to provide in their daily submissions - recognising that in many cases there was insufficient activity to constitute a liquid market with enough real trades to represent a cost of borrowing.
In the years following the Wheatley Review, as bank funding has become less reliant on short-term wholesale deposits, liquidity has continued to fall – such that panel banks have to exercise more ‘expert judgement’ in order to comply with daily submission requirements.
This is as unsatisfactory for panel banks as it is for regulators, and is the reason why, in March 2015, the Bank of England began consultations for the replacement for LIBOR. In July 2017, SONIA was identified as the Risk Free Rate for Sterling markets, with similar exercises being led in the other major currencies.
Barclays is playing an active role in the reform agenda and we’re here to help answer your questions
In a communication recently sent to clients of the Corporate and Investment Bank, we highlight some of the risks market participants should consider and suggest steps to take now to prepare.
The FCA maintains a website with useful materials on benchmark interest rate reform and LIBOR transition.
Please get in touch with your normal Barclays contact if you have any questions.
How do term rates vary between countries?
Overnight RFRs have been identified for all major currencies, but the approach to IBORs varies between countries. Though LIBOR is expected to fall away, other term rates, such as EURIBOR, are expected to continue. However, their use could be limited over time.
What’s happening in the UK?
SONIA, the Sterling Overnight Index Average, is published daily by the Bank of England. It represents the rate paid on overnight, unsecured deposits (greater than, or equal to, £25m) as reported to the Bank’s Sterling Money Market daily data collection.
As an overnight rate, it reflects minimal credit, liquidity, and tenor risk. It’s derived from real transactions with daily volumes of more than £50bn. Administered by the Bank of England, its governance is robust.
The key features of the SONIA market - a high volume of real activity, minimal additional credit premia, and strong governance - make it the strongest candidate to be the replacement Risk Free Rate in Sterling.
What can’t SONIA do?
SONIA is a purer risk free, or near Risk Free Rate (RFR), for determining the cost of borrowing in Sterling, but it’s not a like-for-like LIBOR replacement.
Crucially, SONIA only measures and prices overnight risk, whereas LIBOR quotes for tenors ranging from overnight to 12 months. It is not, for example, possible to set an interest period with a  month SONIA reference rate. It is, however, possible to set an interest period at  months based on SONIA by compounding the daily SONIA rates during the  months.
What are other countries doing?
Other jurisdictions and regulatory bodies are making similar preparations under the Financial Stability Framework, but the timetable in which different currencies move to new RFRs may not be coordinated, and the nature of the replacement RFRs may not be equivalent.
Numerous jurisdictions (for example the Euro Area, Canada, Australia, Japan) have taken a different strategy than that of the US and UK, and are adopting a two rate approach, an overnight rate and a term rate. As an example, no indication has been given that EURIBOR, the Euro Interbank Offered Rate, is likely to cease anytime soon. Rather, the European Commission “expressed confidence that, with necessary reforms, the EURIBOR had good medium-term prospects.” EURIBOR, as a term rate will co-exist with the recently introduced €STR and service both the retail and wholesale product offerings.
Borrowers with exposure to multiple currencies should be aware that there will likely be a transition period where markets, systems and documentation need to cater for new RFRs alongside existing LIBOR mechanisms.
Cash products, including loans, trade and receivable finance products are encouraged by regulators to use overnight compound in arrears rates.
Term rate derivatives of Risk Free Rates (RFRs) aren’t certain and aren’t expected in all currencies. Their usage is expected to be limited to smaller corporate and consumer lending clients, as well as Trade and Working Capital, where cash flows are required to be fixed in advance.
How might compound overnight rates work in the loan market?
A compound RFR is an alternative to existing LIBOR contracts. It is expected that the majority of loans will replace LIBOR with compounded overnight rates. Using this method eliminates the admin heavy burden of paying interest on a daily basis.
However, unlike LIBOR (where the interest is known upfront), when using RFRs, the full interest amount will only be known towards the end of each interest period. Compounded overnight rates have already found favour in both the derivative and bond markets.
The path to transition away from LIBOR is complex. The alternative reference rates are calculated on a different basis to LIBOR. Market and industry conventions for alternative reference rates are expected to vary between certain products and markets; these conventions continue to develop and may change over time. Various jurisdictions are at different stages of transition, and are moving at different speeds towards, potentially different outcomes. It is difficult to imagine a ‘one size fits all’ approach or solution.
Transition will affect both new and existing products referencing these key interest rate benchmarks. The consequences of reform are unpredictable and may have an adverse impact on any financial instruments linked to, or referencing, any of these benchmarks.
Counterparties that hold and/or enter into transactions that reference interest rates benchmarks that are subject to reform or cessation may be exposed to potential risks. These risks include, but are not limited to, the following:
Market participants are encouraged to evaluate their individual circumstances and review their LIBOR-linked exposures. Except where we otherwise agree with you in writing, Barclays does not provide advice, or recommendations on the suitability of your product choice or financial solution. We encourage all market participants to develop a sufficient understanding of the latest developments in LIBOR reform, any exposure they may have to LIBOR benchmarks, along with any expected and potential changes as a result of LIBOR transition and how these changes may impact them and/or their organisation, using independent professional advisors (legal, accounting, financial, tax or other) as appropriate.
Should you require further information on LIBOR transition, the other areas of the website contain a number of resources including FAQs and useful external links.
Intermediaries and Distributors can click here (PDF 89KB) for information on the impact of RFRs on Floating Rate Note (FRN) coupon interest rate payments.
If you wish to discuss any of the risks associated with LIBOR Transition in more detail, please reach out to your Barclays point of contact.
Global regulators are concerned about the robustness of benchmark interest rates such as LIBOR and expect market participants to plan for no LIBOR publication after the end of 2021.
To discuss your business requirements and how Barclays can support you, contact us today.
The latest research and expert analysis, including Brexit insight, from Barclays Corporate Banking.