This publication is intended to provide general background information about changes to interest rate benchmarks, also known as reference rates or benchmark rates. Changes to reference rates can affect certain financial products that customers may have with our company. Customers should inform themselves about the changes to reference rates. If your financial product with our company includes an interest rate benchmark such as: EURIBOR and LIBOR then this publication is relevant to you.

What are interest rate benchmarks?
Interest rate benchmarks are used to determine payments under a financial contract or instrument. The determination of an interest rate benchmark is outside the control of the parties to the contract or instrument. Interest rate benchmarks are essential for the smooth functioning of financial markets and are widely used by banks and other market participants. Various types of transactions use different reference rate benchmarks, but the most common are LIBOR and EURIBOR. Reference rates are used in many different contracts like floating rate notes, loans, swaps, short-term interest rate futures contracts and debt capital markets instruments, as well as homeowner mortgages.

What is happening to benchmark rates?
It is important that reference rates are robust and reliable. European legislation, in the form of the Benchmark Regulation, contains rules to ensure this and aims to improve the functioning and integrity of indices used as benchmarks. Once this legislation comes into force, banks and finance companies, including DLL, may only use interest benchmarks if they are included in a public register intended for that purpose. To be included in this register, interest benchmarks must meet certain requirements.

Due to EU Benchmark Regulations as well as international regulatory developments, several well-known and widely used interest rate benchmark indices are expected to be reformed or discontinued. For most benchmarks that are to be discontinued, alternative rates have already been or are currently being developed.

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:

• UK Financial Conduct Authority
• European Money Markets Institute
• International Swaps and Derivatives Association
• European Central Bank

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.