LIBOR transition to alternative interest rates

Go back 06 March 2020

By now, ACT members should be aware that LIBOR, the widely used set of interest rate benchmarks, is expected to cease after end-2021. Current usage of LIBOR is likely to be much wider than debt and derivatives and often extend to supplier and customer contracts. Identifying and managing the transition of contracts that reference LIBOR will be a key priority for all corporate treasurers. The G20 Finance Ministers recently issued a communiqué emphasising the need to make progress in 2020.

LIBOR Change is happening already: 2 March 2020 marked a key milestone for market makers to switch convention in new GBP interest rate swaps from LIBOR to SONIA. There is a target of end Q3/2020 to cease issuance of GBP LIBOR-linked cash products maturing after 2021.

Treasurers will need to consider the transition for all -IBOR currencies, especially USD LIBOR as well as GBP LIBOR. The New York Fed will begin publishing SOFR averages and a SOFR index.

A welcome development on GBP LIBOR transition was the announcement on 26 February 2020 by the Bank of England (BoE) of its intention to publish a daily SONIA compounded index and potentially a set of ‘period averages’ to simplify use of SONIA, and was seeking feedback by 7 April. (Please see page 8 of the speech by Andrew Hauser, Executive Director Markets. The “roadmap” diagram is incorporated on page 3).

The ACT remains highly engaged in various official working groups and we welcome input from members by e-mail to technical@treasurers.org. Treasurers will need to keep up to date with developments in LIBOR transition and to ensure that their non-Treasury colleagues are sufficiently well-informed. To help in this process, a joint ACT / Bank of England / FCA / CBI “1 page” introduction to LIBOR transition is available here. This explains some of the terms used above.

The latest version of the ACT's briefing note for members “Transition to Risk-Free Rate Benchmarks – A Treasurer’s Checklist” is here (accessible for ACT members only) but, as mentioned, LIBOR transition and conventions will keep evolving – so keep checking our website for the latest news.

The ACT will soon be publishing version 3 of joint slide pack with LMA: “the future of LIBOR: what you need to know” (version 2). In summary, the key actions for treasurers should include:

  • Identify and make an inventory of all usages of LIBOR (commercial contracts as well as financial instruments). Examples are given in the briefing materials.
  • Look at your inventory and work out what, how and when to transition.  
  • Ensure that valid fallback clauses exist in related legal documentation (including debt instruments/facilities) in anticipation of the permanent cessation of LIBOR. This may include, for example, late payment clauses in commercial contracts.
  • Engage with your banks, asking them how they propose to transition legacy contracts and new business. Agree an inventory of contracts per bank.  
  • Do not rely on the potential development of new term rates.  New conventions are evolving but it seems that much of the market will have to transition to a backward-looking rate compounded in arrears with a spread adjustment, in contrast to the forward-looking term rates offered by LIBOR.     
  • Assess any accounting and tax implications, especially where hedging is involved.
  • Prepare to update systems and operational processes. Plan resourcing accordingly.

 

James Winterton, Associate Director - Policy & Technical, ACT

 

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