When is the LIBOR transition happening?
There is no hard regulatory deadline attached to LIBOR transition. Regulators though are pushing for LIBOR to be replaced before the end of 2021. The FCA (regulator for the administrator of LIBOR) for instance, has publicly stated that it will no longer require banks to participate in the LIBOR panel after 2021. In practice, the transition path will be different per LIBOR currency and may conclude well ahead of the end of 2021, dependent on market adoption of the alternative rate.
Through various working groups and the Financial Stability Board’s Official Sector Steering Group (OSSG), there is international coordination on benchmark reform and the transition to alternative rates. For your reference, please find below a non-exhaustive overview of the recommended alternative rates per LIBOR currency, which reflects our understanding of the status as it stands as of February 2020. Click the image for larger version
To learn more, please refer to the FCA publication: Transition from LIBOR
What is happening?
In order to become BMR (Benchmark Regulation) compliant, the European Money Markets Institute (EMMI) EMMI has gradually implemented a new calculation methodology for EURIBOR – the so called “hybrid methodology”. This calculation method makes use of actual transactions as much as possible, while also using expert judgement for the cases where actual transactions are not available. EMMI stated that EURIBOR reform “does not change EURIBOR’s Underlying Interest, which has always been seeking to measure banks’ costs of borrowing in unsecured money markets”. Consequently, EMMI stated that “this reform is a clarification of the existing Underlying Interest of EURIBOR, combined with adapting a robust and BMR compliant methodology”. In early December 2019, EMMI confirmed that it has completed the phase –in of all Panel banks to the EURIBOR hybrid methodology.
Some useful links where you can find more information on the upcoming changes are set out below:
Are these changes an initiative of DLL?
No, the changes are proposed by industry-wide working groups on the recommendation of supervisors and central banks. More information and background can be found on the website of the Nederlandse Vereniging van Banken (NVB).
Are these changes only relevant for DLL products?
No. Any contract that references an affected reference rate will be subject to change, whether this contract is entered into with DLL or another entity.
Which DLL customers will have to deal with changes of reference rates?
All customers who have contracts with any of the following benchmarks:
- USD LIBOR
- GBP LIBOR
- EURIBOR
What effect does this have on my agreements with DLL?
Changes in benchmark rates may have consequences for financial instruments and contracts in which interest rate benchmarks are referenced. When an interest rate benchmark is discontinued during the life of the instrument, we will have to use a modified or alternative interest rate benchmark for determining obligations under these instruments, contracts or agreements.
We will continue to update you as interest rate benchmark reforms and transitions develop. We will inform you of any required changes to legal documentation to facilitate this transition. Such changes could include the addition of fallback provisions in financial contracts to set out the alternative rate that would be applied should a benchmark cease to be available.
Any further questions?
If you have any questions, please do not hesitate to contact us via benchmark.rate.reform@dllgroup.com.