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 Update
The ECB has recommended that the euro short-term rate (ESTER) becomes the risk-free rate for the euro currency. ESTER will replace the EONIA, which will see its use restricted as of 1 January 2020, due to it not being compliant with EU Benchmarks Regulation.
ESTER will also provide a basis for developing fallbacks for contracts referencing the Euribor, as the compliance of its reformed methodology with the requirements of the EU Benchmarks Regulation will be assessed in 2019.
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.
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.
- 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
- FCA – Benchmarks resources
- Swiss National Bank – The National Working Group on Swiss Franc Reference Rates resources