New reference interest rates on Capital Markets: Our experts support you comprehensively
The UK financial regulator seals the end of LIBOR rates
The UK Financial Conduct Authority (FCA) already announced in 2017 that it will no longer guarantee the LIBOR panel after 2021.
In recent years, the FCA regularly stressed that LIBOR is hardly likely to survive after 2021. In its letter from January 2020, it set out clear milestones for reducing exposure to LIBOR and shifting it towards SONIA.
On 23 June 2020, the UK Chancellor of the Exchequer announced his intention to extend the powers of the FCA to allow a managed and orderly end to LIBOR if
- the LIBOR panel becomes too small,
- the FCA makes a statement of non-representativeness of LIBOR, for example, because the LIBOR panel no longer reflects the underlying market,
- the underlying market has become too small and insignificant (in daily traded market volume) for the requirements of benchmark interest rates.
On 5 March 2021, the UK Financial Conduct Authority (FCA) announced that the LIBOR rates for the currencies CHF, EUR, GBP and JPY are no longer representative of their underlying markets as of 31 December 2021 and, hence, shall not longer be used beyond that date.
In case of USD LIBOR, usage of LIBOR rates is permissible for legacy assets only until 30 June 2023, however only for major tenors. 1 week and 2 months tenors will cease to be published also for USD from 2022 onwards.
However, the market transition in all currencies (including USD), especially also for new business, should be completed earlier, according to statements by the supervisory authorities and working groups.
In most cases, therefore, DZ BANK believes it is essential to actively convert and renegotiate contracts ("repapering"), as this is the only way to ensure that transactions are converted in a targeted manner that is appropriate for the customer and can be easily managed operationally.
Affected products are:
Floating rate notes (FRN) often refer to LIBOR rates. In the various jurisdictions, the progress of the changeover to RFR-referencing FRNs varies. For example, new GBP-denominated FRNs refer almost exclusively to the (compounded) SONIA.
The conversion of existing securities entails the difficulty that the issuer usually does not know the holders of the securities and therefore cannot directly obtain their consent to the change of the interest rate.
This task could be carried out by depositaries or other intermediaries where appropriate. The approval rates (2/3 majority or unanimity) vary depending on the legal basis. A uniform market approach has not yet been established.
The different legislators have recognised that there may be uncertainties in the conversion of securities. For this reason, various draft laws are currently being planned (e.g. UK, EU, USA) to establish a legal framework.
For many products and currencies, variants based on overnight rates already existed before the IBOR reform. The use of products with reference to the new RFR is constantly increasing.
Some variants and arragement details based on RFRs, have yet to establish themselves in the market.
ISDA has added detailed fallback rules for LIBOR rates in its 2006 definitions. Put simply, if LIBOR ceases to exist compounded RFRs in the respective currency and the respective interest period (e.g. 3M USD LIBOR to 3M compounded SOFR) are used instead of LIBOR with a fixing at the end of the interest period (“fixing in arrears”). Since these rates assume different values, an additional adjustment spread is to be added, which is calculated as the median of the difference between the two rates over the period of last 5 years.
The DZ BANK AG has joined the ISDA 2018 Benchmarks Supplement Protocol and the ISDA 2020 IBOR Fallbacks Protocol.
LIBOR is used as a reference value in variable-interest loans in foreign currencies (not EUR). These can be bilateral loans or syndicated loans, based on bilateral agreements or international standards (e.g. LMA).
In the course of 2Q2021 and in case of clients’ demand, DZ BANK plans to offer loans with interest rates based on risk-free rates, particularly in major the currencies USD, GBP and CHF, instead of products referencing LIBOR.
With regard to the variants and conventions, no final market standards have yet been established. The situation will continue to develop dynamically in the coming months.
At the same time, the various working groups publish recommendations for the market.
By the end of 2021 (N.B. USD until 30 June 2023), DZ BANK (together with the syndicate partners) intends to convert existing loan agreements to the new interest rates. The economic situation should be maintained. DZ BANK will contact the affected borrowers in good time.
The markets are currently in motion. In many cases a uniform market standard has not yet been established.
If you have any questions regarding the EONIA conversion, please contact your usual contacts at DZ BANK or a contact person named on the IBOR Transition page.