2023 – Highlights of the FSB progress report on the LIBOR and other benchmark transitions
On December 16, 2022, the Financial Stability Board (“FSB”) published a progress report on the London Interbank Offered Rate (LIBOR) and other benchmark transitions.
They acknowledged that "there is still substantial work to be done" but see "good progress in the transition from USD LIBOR to SOFR in 2022."
The requirement for "market participants to be actively taking actions to remedy existing legacy contracts" has been emphasised. There is still more work to be done because there is still an estimated USD 2 trillion in outstanding LIBOR-based business loans.
Market participants are urged to prevent a "pile up" situation towards the end of June 2023. Financial institutions were given an evaluation questionnaire by the FSB in June 2022, and the
answers were then made public in the report.
The complete message is not being comprehended in every region of the world, as it has been emphasised that "banks should establish proper communication protocols on LIBOR transition with different stakeholders". The challenge of using a 'one-size-fits-all strategy' for a worldwide banking firm was also observed by another jurisdiction: "Banks need to promote their transition activities in a globally consistent manner, taking into consideration varying scenarios of transition in each region."
The FSB gave an update on the following jurisdictions regarding non-LIBOR benchmarks:
• Australia- For securities issued after December 31, 2022, to be eligible as collateral for the reserve bank act liquidity facilities, they must have strong ‘fall-backs’ when employing bank ‘bull’ swap rates.
• Canada- Canadian dollar offered rate (“CDOR”) won't be issued after June 28, 2024. Beginning at the end of June 2023, the derivatives and securities markets must stop using CDOR, while the loan market has until the end of June 2024. The Canadian overnight repo – full word. Repo is shortened. rate average (CORRA) is being developed to ease the transition for the credit market.
• European Union- The European money markets institute and ICE benchmark administration limited (also known as IBA) now issue forward-looking Euro short-term rates to be utilised as the Euro interbank offered rate fall-back rates.
• Mexico- The new overnight interbank equilibrium interest rate also known as the Mexican risk-free rate, which was originally announced in January 2020, is now being used more frequently. By December 2023 for the three and six months tenors and by December 2024 for the 28-day tenor, the usage of the prior term interbank equilibrium interest rate is expected to be prohibited in new goods. The authorities intend to amend the Mexican interbank offered rates calculation process so that it is now based on the new risk-free rate and only enables the use of them for legacy contracts, while the new risk-free rate will be the rate that must be used for new transactions.
• Singapore- Beginning at the end of June 2023, the SGD swap offer rate will no longer be offered. Exposures to previous SOR deals have decreased as well. As of June 2022, bilateral corporate loan exposures (in short medium enterprise loans) have decreased by 55% from S$57 billion to S$26 billion and syndicated loan exposures have decreased by 50% from S$62 billion to S$31 billion. As of June 2022, the exposure to retail loans had more than halved to only over 4,000 transactions.
Mauritius is currently using Secured Overnight Financing Rate (SOFR). Beginning of January 2020, the Bank of Mauritius (the “Bank”) began communicating with banks about the LIBOR shift. In order to assess the main transitional, operational, accounting, technical, and legal problems that banks in the Mauritian jurisdiction were dealing with during the transition, the Bank initially carried out a preliminary survey. To evaluate the progress made by banks in the transition process and acquire specific data on their readiness to switch to alternative reference rates, the Bank conducted a thorough follow-up survey in October 2020. The Bank then convened one-on-one meetings with banks in January and February 2021 to outline the transition process' future and have in-depth conversations about their progress and issues. Banks have already updated their systems to accommodate the new pricing techniques, spoken with their clients, and established backup clauses in LIBOR contracts that stretch past end-2021/30 June 2023, when appropriate.
To conclude, market stability and integrity have improved as a result of the switch from LIBOR to overnight risk-free rates and measures to strengthen the reliability of interest rate benchmarks. The market has already switched new activity away from LIBOR and toward risk-free rates, even if some panel-based US dollar settings will continue to be used until the end of June 2023 to assist the transition of legacy contracts.