AFME is closely engaged with regulators and policymakers in the UK and the Eurozone on the issue of transitioning from IBORs (Interbank Offered Rates) to new risk-free reference rates.
Given the prominent role IBORs currently play in capital markets; acting as the reference rates for financial contracts such as bonds, securitisations and derivatives worth in the order of €100tns globally, we believe it is vital that concerted and coordinated action is taken to ensure a smooth transition to new risk free reference rates.
As well as leading our own work in this area, AFME also co-ordinates carefully with other trade associations including SIFMA, GFMA, ICMA and ISDA. ISDA in particular is playing a key role on this topic due to the much larger size of derivatives markets relative to the cash markets.
We have been leading on issues relating to securitisation, which is disproportionately affected by the transition as most term securitisations are floating rate (off Libor or Euribor), have long maturities (so there is a big legacy issue as they are less likely to roll off in the next 2-3 years) and often contain embedded interest rate or currency swaps which swap the yield on the securitised assets (fixed, discretionary, managed rate) to the IBOR on the bonds issued.
AFME is also a member of a number of industry working groups, such as the Bank of England’s RFR Bond Market Sub-Group, the Bank of England’s RFR Term Rates Sub-Group, the ECB’s RFR Workstream #2 on Identification and recommendation of Term Structures on RFR and the ECB’s RFR Workstream #3 on Contractual Robustness, Legacy and New Contracts.
EU Benchmarks Updates
The ECB has recommended that the euro short-term rate (ESTER) becomes the risk-free rate for the euro currency. ESTER will replace the euro overnight index average (EONIA), which will see its use restricted as of 1 January 2020, due to it not being compliant with EU Benchmarks Regulation.
The working group on euro risk-free rates is currently consulting on the transition from EONIA to ESTER. In particular it is seeking market feedback on its assessment of alternative ESTER-based term structure methodologies that can serve as a fallback for EURIBOR-linked contracts, as well as on their specific use cases.
Deadline for responses is 1 February 2019
Swiss Benchmark Updates
FINMA issued a short guidance note on LIBOR risks covering legal risks, valuation risks and risks in relation to operational readiness.
US Benchmark Updates
- The US Alternative Reference Rates Committee (ARRC) has released consultations on USD-LIBOR fallback contract language for bilateral business loans and securitisations. The deadline is 5 February 2019. These consultations follow the previous FRN and syndicated loan consultations (see press release with links here).
- The responses to the ARRC consultation paper on fallbacks for USD-LIBOR FRNs have been published here.
Issuance of Sterling Bonds referencing LIBOR
The Sterling Working Group on Risk Free Rates has published a paper on New Issuance of Sterling Bonds referencing Libor.
The paper discusses risks associated with issuing LIBOR bonds now, and possible mitigants for bond market participants to consider. The considerations are likely to have relevance for issuance of international floating rate bonds in all currencies for which Libor is quoted, including of course securitisations.
The Working Group on Sterling RFRs of the Bank of England has issued a consultation paper on forward looking term SONIA Reference Rates.
ISDA Benchmark Supplement Protocol
Entities that adhere to the protocol are also able to choose whether the ISDA Benchmarks Supplement should only apply to new transactions under existing ISDA Master Agreements or whether they also want it to apply to existing transactions. Until both parties elect for it to apply to their legacy transactions, the protocol will only apply to new transactions.
Note that the ISDA Benchmarks Supplement is separate from ISDA’s work on IBOR fallbacks
AFME work on IBOR Transition:
- AFME has produced model securitisation wording for the new issue of bonds. The model wording is securitisation specific and it provides a new and easier mechanism to accommodate the transition from IBOR into an alternative benchmark rate, when LIBOR/EURIBOR is no longer available. The wording does not identify the new rate but makes the procedure for moving to such a rate (once identified) easier, without the need of holding a bondholders’ meeting. The model wording has been used by market participants and has been well received by regulators, including being mentioned in Andrew Bailey’s July 2018 speech on LIBOR. A new and updated version of the wording is currently being worked on - please get in touch if you would like to contribute.
- AFME jointly published the IBOR Global Benchmark transition report with ISDA, ICMA and SIFMA in June 2018. The report presents the results of a survey with 150 banks, end users, infrastructures and law firms in 24 countries, and assesses the issues involved with benchmark reform. Its findings highlight the scale of the work which still needs to be done by industry to ensure full readiness for the transition. It also makes specific recommendations for steps firms can take to be fully prepared.
Key external links:
- ISDA/GFMA/FIA/EMTA Briefing on the need to extend the transition period of the Benchmark Regulation in respect of critical and non-critical benchmarks
- Interest rate benchmark reform: transition to a world without LIBOR, Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg, London, 12 July 2018
- The future of LIBOR, Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg London, 27 July 2017
- Bank of England – Transition to sterling risk-free rates from Libor resources
- ESMA – Benchmarks resources
ESMA – Q&A on Benchmark Regulation
- FCA – Benchmarks resources
- Swiss National Bank – The National Working Group on Swiss Franc Reference Rates resources