LIBOR Transition – A Quick take

Posted on: March 3, 2022 | By: M Vaseem Sheikh Head, Treasury Sales Federal Bank

1. What is LIBOR?  

LIBOR stands for London Interbank Offered Rate and is published by the Intercontinental  Exchange (ICE) Benchmark Association, UK. It is currently the accepted key benchmark  interest rate for borrowing between banks in the international market. LIBOR is also the basis  for FCY loans in countries around the world, thus impacting consumers as much as Financial  Institutions. LIBOR is published for major currencies in different tenors (overnight, 1-week, 1- month, 3-months, 6-months, 1-year). The 3-months term is most common.  

LIBOR is used worldwide in a variety of financial products including:  

  • Consumer loans products  
  • Deposits 
  • Syndicated loans 
  • Interest rate swaps and other derivatives

2. Why are regulators vouching for the markets to stop using LIBOR?

 LIBOR was subject to a lot of criticism due to its susceptibility to manipulations. Regulators  had concerns about the long-term sustainability of the benchmark and therefore decided to  pre-empt any further possible deterioration by switching to other reference rates.  

3. As from when will LIBOR no longer be published?  

LIBOR for Sterling, Euro, Yen and Swiss franc will cease to be published on 31st December  2021, while US Dollar LIBOR will cease on 30th June 2023.  

4. Which rates are likely to replace LIBOR?  

Regulators want market participants to use rates based on overnight, virtually risk-free rates.  The following ARRs (Alternative Reference Rates) have been identified by various  jurisdictions for their respective local currency: 

Currency  Approved ARR  Published by
US Dollar  SOFR (Secured Overnight Funding Rate)  Federal Reserve Bank of New  York
Sterling  SONIA (Secured Overnight Index  Average) Bank of England
Euro  €STR (Euro Short-Term Rate)  European Central Bank


SARON (Swiss Average Rate Overnight)  SIX Swiss Exchange
Yen  TONAR (Tokyo Overnight Average Rate)  Bank of Japan

5. What are ARRs and how do they differ from LIBOR?  

Overnight Deposits  Interbank Offered Rates overnight to 1 year
Calculated in arrears / backward looking  Forward looking
Risk Free or nearly Risk Free  Incorporates Credit Risk
Transaction based  Submission or partly transaction based
Future cash flow based on compounding  in arrears Term Rate, certain future cash flows set by  each tenor

6. What the market participants need to do? 

First of all, assess the entire portfolio (Assets & Liabilities) which is benchmarked to LIBOR  currently and filter the impacted ones basis the currency-wise cessation dates. All the  Deposits, Loans & Derivatives need to be taken in account for the assessment.

7. What will happen to existing impacted trades?

All the impacted trades (deposits, loans, derivatives) need to be moved to respective ARRs  post the cessation date. The counterparties for deposits & loans need to mutually decide on  adopting new ARRs/spreads. The transition to new ARRs for derivatives will be guided by  ISDA (International Swaps & Derivatives Association). 

8. What should be the preparedness for adopting the new ARR regime?

Majorly it’s to build the required IT infrastructural capabilities to take care of the ARR world.  As the benchmark is daily rates, compounding of daily rate, calculating in arrears, adoption of  calculation methodology (lookback/lockout) are key features. Building of risk management  solutions to take care of valuations is also an important development which needs to be taken  care of. Fresh legal contracts/addendum needs to be executed.

9. Whether I can take new LIBOR exposures as for USD, the expiry is June, 2023? Various regulators have advised not to take any fresh LIBOR exposures as the extension in  cessation (specially for USD) is provided mainly to take care of legacy trades. Hence fresh  exposures to be referenced to ARRs. Term ARRs also have been developed to provide ease  to some of the products (specially trade finance).

10. What are the changes envisaged on Indian landscape on this space?

Reserve Bank of India (RBI) has already urged the market participants to prepare themselves  to move away from LIBOR. Indian Bank Association (IBA) is spearheading this development  for Indian markets. The products like Trade Credit and ECB which has an all-in-cost regulatory  ceiling, will require a fresh guidance from RBI. At the same time a unified approach for interest  calculation methodology for various loan products is also warranted. Trade Finance products  are recommended to use Term Rates instead of overnight ARRs due to its inherent product  demand. Modified MIFOR (Mumbai Interbank Forward Outright Rate) will be the benchmark  for derivatives on ARRs, whereas Adjusted MIFOR will support the legacy trades slated for  transition to ARRs.