IBOR reforms

Overview

Interest rate benchmarks including, among others, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed.

On 5 March 2021, the Financial Conduct Authority (FCA), the UK regulator, announced that all LIBOR settings for all currencies will either cease or no longer be representative immediately after the following dates:

  • 31 December 2021, for Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings in all tenors, and US Dollar LIBOR 1-week and 2-month settings; and
  • 30 June 2023, for US Dollar Overnight, 1-month, 3-month, 6-month and 12-month settings.

Regulatory authorities and public and private sector working groups in several jurisdictions, including the International Swaps and Derivatives Association (ISDA), the Sterling Risk-Free Rates Working Group, the Working Group on Euro Risk-Free Rates, and the Alternative Reference Rates Committee (ARRC), have been discussing alternative benchmark rates to replace the IBORs. These working groups are also considering how to support a transition to alternative rates and the development of new products referencing them.

These reforms are expected to cause some interest rate benchmarks to either perform differently to the way that they do currently or to disappear. This may impact the HSBC products and services you currently use and those we may provide in the future.

The content of this page reflects HSBC’s current understanding of the expected changes as at 15 July 2021. There still remains a high degree of uncertainty around LIBOR transition. This overview is not complete or exhaustive and does not constitute any form of advice or recommendation. Clients should contact their professional advisors on the possible implications of the changes such as financial, legal, accountancy or tax consequences.

Background

A wide range of financial products such as derivatives, bonds, loans, structured products and mortgages, use benchmark rates to determine interest rates and payment obligations. Benchmark rates are also used to value certain financial products and as a performance tracker for funds, among other purposes.

LIBOR, probably the most widely used benchmark, is used in financial products denominated in a number of currencies and is published in GBP (British Pound), USD (US Dollar), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc).

Certain currencies also use specific benchmarks such as EURIBOR and EONIA for EUR, the Tokyo Interbank Offered Rate (TIBOR) for JPY, the Hong Kong Interbank Offered Rate (HIBOR) for Hong Kong Dollar and the Singapore Interbank Offered Rate (SIBOR) for Singapore Dollar.

Financial regulatory authorities have expressed their concern that the interbank lending market, which IBORs are intended to reflect, is no longer sufficiently active or liquid. In particular, the regulatory concern is that the low levels of underlying activity make it “fragile and more susceptible to liquidity and amplification effects in financial markets”.

This concern has resulted in recommendations made by the Financial Stability Board (FSB) in 2014 to reform major interest rate benchmarks and use near risk-free rates (RFRs) that are based on more active and liquid overnight lending markets, instead of IBORs where appropriate.

RFRs are typically backward-looking overnight rates based on actual transactions and reflect the average of the interest rates that certain financial institutions pay to borrow overnight either on an unsecured basis from wholesale market participants for unsecured RFRs, such as the Sterling Overnight Index Average (SONIA) or the average rate paid on secured overnight repurchase or “repo” transactions for secured RFRs, such as the Secured Overnight Financing Rate (SOFR).

RFRs do not include or imply any credit or term premium of the type seen in LIBOR or EURIBOR. However, RFRs are not truly free of risk. RFRs can rise or fall as a result of changing economic conditions and central bank policy decisions.

What are the replacement benchmarks and which benchmarks are changing?

RFR working groups in a number of jurisdictions have identified replacement benchmarks and continue to develop strategies for transition. Select examples of benchmarks which are either being replaced or benchmarks where changes either have or are expected to be made to their methodology (notably the way in which they are determined) are set out in the table below.

Currency

Current rate

Alternate Rate

Anticipated Approach

Australian Dollar (AUD)

Bank Bill Swap Rate (BBSW)

BBSW’s new methodology became effective on 21 May 2018. The Cash Rate, also referred to as AONIA, is a pre-existing rate that will become the RFR for AUD.

Australia is adopting a multi-rate and maintains the BBSW as the credit-based benchmark for the Australian Dollar.

Canadian Dollar (CAD)

Canadian Dollar Offered Rate (CDOR)

An updated version of the Canadian Overnight Repo Rate Average (CORRA), a pre-existing rate, has been identified by the Bank of Canada's Canadian Alternative Reference Rate Working Group as the preferred RFR for Canada.

Canada is adopting a multi-rate approach with both CDOR and CORRA co-existing as interest rate benchmarks. The calculation and publication of the 6-month and 12-month CDOR tenors will cease from Monday, 17 May 2021 onwards. The 1-month, 2-month and 3-month tenors will not be affected.

Swiss Franc (CHF)

CHF LIBOR

Swiss Average Rate Overnight (SARON).

Transition to SARON, which is a pre-existing rate that was recommended as the alternative to CHF LIBOR in October 2017. LIBOR is expected to cease after end-2021.

Euro (EUR)

Euro Overnight Index Average (EONIA)

Euro Short-Term Rate (€STR).

Transition to €STR. EONIA continues to exist under a new methodology since 2 October 2019 to allow a smooth transition to €STR. EONIA is expected to be discontinued on 3 January 2022.

Euro (EUR)

Euro Interbank Offered Rate (EURIBOR) and EUR LIBOR

€STR.

Multiple rate approach. EURIBOR: reforms to EURIBOR’s methodology were completed in Q4 2019. EURIBOR is expected to continue alongside €STR beyond 2021 and there is no current indication it will cease in the near future. However, the ECB recommends using €STR as the primary basis for a fallback rate (where appropriate).

EUR LIBOR: LIBOR is expected to cease after end-2021. Market participants are expected to transition to €STR.

Sterling (GBP)

GBP LIBOR

Sterling Overnight Index Average (SONIA).

Transition to SONIA. SONIA has been subject to a number of reforms and these were implemented from 23 April 2018. LIBOR is expected to cease after end-2021.

Hong Kong Dollar (HKD)

Hong Kong Interbank Offered Rate (HIBOR)

Hong Kong Overnight Index Average (HONIA), which was a pre-existing rate.

HIBOR has been subject to a number of reforms.

The Working Group on Alternative Reference Rates and Hong Kong Treasury Markets Association identified HONIA as the alternative RFR but announced there is no plan to discontinue HIBOR. Hong Kong will therefore adopt a multi-rate approach, whereby HIBOR and HONIA will co-exist.

Japanese Yen (JPY)

JPY LIBOR, Tokyo Interbank Offered Rate (TIBOR) and Euroyen TIBOR

Tokyo Overnight Average Rate (TONAR) is the alternative RFR for Japanese Yen.

Reforms to TIBOR.

Japan is implementing a multi-rate approach with TONAR being promoted by the JPY Committee where appropriate, while recognising that the JBATA implemented TIBOR reforms should ensure that TIBOR can continue to be used. Considering the developments in international financial benchmark initiatives, JBATA has started to discuss the issue of integrating JPY TIBOR and Euroyen TIBOR, with the possibility of Euroyen TIBOR being discontinued.

Singapore Dollar (SGD)

Singapore Interbank Offered Rate (SIBOR)

Anticipated transition to the Singapore Overnight Rate Average (SORA), a pre-existing overnight rate.

SIBOR is expected to be discontinued.

Recommended transition from SIBOR to SORA as part of a SORA-centred approach.

On 29 July 2020, the Association of Banks in Singapore (ABS), Singapore Foreign Exchange Market Committee (SFEMC) and the Steering Committee for SOR Transition to SORA (SC-STS) issued a joint industry report recommending the discontinuation of SIBOR and a shift to the use of SORA as the main interest rate benchmark for SGD financial markets.

Singapore Dollar (SGD)

Swap Offer Rate (SOR)

SOR is a pre-existing rate largely used in the derivatives market. Since USD LIBOR is an input for the calculation of SOR, the outlook for USD LIBOR beyond end-2021 has implications for the long term viability of SOR. SOR is also expected to be replaced by the SORA.

Transition to SORA. Various recent and ongoing work relating to the SOR to SORA transition. Important recent publications include the SC-STS transition roadmap from SOR to SORA and key priorities for 2020 (April 2020) and the SC-STS statement (June 2020).

US Dollar (USD)

USD LIBOR

Secured Overnight Financing Rate (SOFR).

Transition to SOFR, which has been published since April 2018. US Dollar LIBOR 1-week and 2-month settings will cease 31 December 2021; US Dollar Overnight, 1-month, 3-month, 6-month and 12-month settings will cease 30 June 2023.

 

The table above is not exhaustive and is provided for general information purposes only. There may be other benchmarks which may be either discontinued or where changes have or will be made to their methodology.

The differences between IBORs and RFRs

LIBOR and most other IBORs are intended to measure unsecured interbank lending rates and therefore include or imply a credit spread.

The proposed RFRs are based on short-term wholesale transactions for unsecured RFRs (i.e. SONIA, TONA and €STR) and repurchase or "repo" transactions for secured RFRs (i.e. SOFR and SARON). As a result, RFRs do not require such a credit spread due to their overnight and near risk free nature. RFRs are, therefore, in most cases expected to be lower than their IBOR equivalents.

IBORs are "term rates", which means they are published for different periods of time such as 3 months or 6 months and are "forward looking", which means they are published at the beginning of the borrowing period. Due to IBORs “forward looking” nature it incorporates a term premium to compensate for the risk of default over the term for which it is calculated.

Most RFRs are "backward-looking" overnight rates based on actual historic transactions. They are published at the end of the overnight borrowing period. RFRs therefore do not incorporate any term premium which is imbedded in the IBOR calculation due to lending to another bank on a longer-term basis.

It is important to note that RFRs are not free of risk, hence they are considered “near risk-free”. RFRs can rise or fall as a result of changing economic conditions and central bank policy decisions.

To transition existing contracts and agreements that reference IBORs to the alternative benchmark rates, adjustments for credit and term differences may need to be incorporated and applied to the alternate rate. Industry working groups are reviewing methodologies for calculating these so-called “spread adjustments” and are considering whether robust forward-looking term versions of the RFRs can be developed.

When will the changes take effect?

On 5 March 2021, the Financial Conduct Authority (FCA), the UK regulator, announced that all LIBOR settings for all currencies will either cease or no longer be representative immediately after the following dates:

  • 31 December 2021, for Sterling, Euro, Swiss Franc and Japanese Yen LIBOR settings in all tenors, and US Dollar LIBOR 1-week and 2-month settings; and
  • 30 June 2023, for US Dollar Overnight, 1-month, 3-month, 6-month and 12-month settings.

The FCA also stated it will consult in 2021 on the publication of certain LIBOR settings on a ‘synthetic’ basis (a different calculation methodology) after the aforementioned dates to potentially support the transition of ‘tough legacy’ contracts (contracts that are expected to be particularly difficult to transition) in limited circumstances.UK LIBOR Transition Recommendations

UK LIBOR Transition Recommendations

On 24 February 2021, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) reiterated its recommendation to banks to cease issuance of GBP LIBOR loans, bonds, securitisations and linear derivatives that expire post 2021 by 31 March 2021 and to cease issuance of GBP LIBOR non-linear derivatives that expire post 2021 by 30 June 2021, unless these derivatives are used for risk management purposes or to facilitate transition. The RFRWG also recommended to cease issuance of cross-currency derivatives with a GBP LIBOR leg that expire post 2021 during Q2/Q3 2021 unless used for risk management purposes. The RFRWG published a guidance document that provides a definition of risk management purposes.

US LIBOR Transition Recommendations

In November 2020, the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) issued supervisory guidance whereby banks were encouraged to transition away from USD LIBOR as soon as practicable and not to enter into new transactions referencing USD LIBOR after 31 December 2021 unless they are used for market making or for existing LIBOR-based exposure hedging. In December 2020, the ARRC confirmed that its recommended best practice to cease issuance of USD LIBOR based loans, derivatives and securitisations that expire post 2021 by 30 June 2021 was fully consistent with the timelines and message set out in the US supervisory guidance.

Impact on HSBC’s loan and derivative product offering

Issuance of new contracts referencing USD LIBOR

Since January 2021, HSBC has been offering the Secured Overnight Financing Rate (SOFR) instead of US Dollar LIBOR (USD LIBOR) for bonds.

Following U.S. regulators’ supervisory guidance, in the US, HSBC will cease originating Lending and Trade facilities based on USD LIBOR as soon as practicable and in any event by 31 December 2021.

From 1 July, HSBC will continue to offer SOFR, simple or compounded in arrears for Lending facilities and Term SOFR or Overnight SOFR for Trade facilities, where such SOFR rates are available. Depending upon the Alternative Reference Rates Committee (ARRC)’s recommended uses cases, Term SOFR may also be offered for new or refinanced USD lending facilities.

Should adoption of a SOFR rate not be practicable, we will also offer USD LIBOR based Lending and Trade facilities. Drawdowns under committed or uncommitted USD LIBOR based contracts entered into on or before 30 June 2021 are allowed to continue after 1 July 2021 until their annual renewal date, provided such date is before 30 June 2023, upon which they will be transitioned to SOFR or another alternative reference rate.

When USD LIBOR is used for contracts that mature after 30 June 2023, we will include contractual provisions such as the ARRC’s hardwired fallback language or a “switch mechanism” whereby the contract would switch from USD LIBOR to SOFR upon a specified trigger or date, ahead of 30 June 2023. Your relationship manager will inform you of any other forms of contractual language that may be available depending on the product and jurisdiction.

In line with current regulatory guidance, we will stop offering USD LIBOR from 1 January 2022 for Lending facilities, Trade facilities and derivatives, unless the derivatives are used for risk management purposes or to facilitate LIBOR transition.

The aforementioned dates are subject to ongoing review of regulatory guidance and market developments.

Note that the interdealer USD Swap market will take a step towards USD LIBOR transition on 26 July 2021 by adopting a ”SOFR first” convention among dealer participants who are expected to offer SOFR as the first benchmark rate option for their interdealer transactions. Although this initiative coordinated by global regulators will not directly impact end users, it aims to facilitate the transition away from USD LIBOR by helping increase liquidity in the SOFR market.

Issuance of new contracts referencing GBP LIBOR

In line with the Working Group on Sterling Risk-Free Reference Rates’ recommendation, since 1 April 2021, HSBC has been offering contracts based on SONIA in arrears instead of GBP LIBOR for Lending facilities. The Bank of England Base Rate (Base Rate)2 and fixed rates may also be available for bilateral loans in your jurisdiction, subject to eligibility criteria.

Our contracts for Trade facilities are based on Term SONIA or Overnight SONIA and Base Rate where available.

HSBC has also been offering SONIA instead of GBP LIBOR for linear derivatives such as futures, forwards, and swaps since 1 April 2021, and will do the same for non-linear derivatives such as caps, floors, and swaptions from 1 July 2021. We expect our clients and counterparties to only enter into GBP LIBOR based derivatives for the purposes set out in the RFRWG guidance document, which includes the risk management of existing positions.

Issuance of new contracts referencing EUR LIBOR

Since 1 April 2021, HSBC has been offering Lending and Trade facilities based on EURIBOR with contractual fallback to the Euro short-term rate (€STR), €STR in arrears, or the ECB Main Refinancing Rate instead of Euro LIBOR (EUR LIBOR) depending on the product, jurisdiction and subject to eligibility criteria.

From 1 January 2022 (1 July 2021 in Singapore3), HSBC will offer EURIBOR or €STR instead of EUR LIBOR for bonds and derivatives.

Issuance of new contracts referencing CHF LIBOR

From 1 July 2021, HSBC will offer Lending and Trade facilities based on the Swiss Average Rate Overnight (SARON) in arrears, Overnight SARON or the Swiss National Bank (SNB) Policy Rate instead of Swiss Franc LIBOR (CHF LIBOR), depending on the product and subject to eligibility criteria.

From 1 January 2022 (1 July 2021 in Singapore3), HSBC will offer SARON instead of CHF LIBOR for bonds and derivatives.

Issuance of new contracts referencing JPY LIBOR

Following the Bank of Japan (BOJ)’s recommendations, from 1 July 2021, HSBC will offer Lending and Trade facilities based on the Tokyo Overnight Average rate (TONA) in arrears, Overnight TONA, Tokyo Term Risk Free Rate (TORF), or the Tokyo Interbank Offered Rate (TIBOR) instead of Japanese Yen LIBOR (JPY LIBOR), depending on the product, jurisdiction and subject to eligibility criteria.

HSBC will offer TONA or other alternatives instead of JPY LIBOR, where available and subject to eligibility criteria, from 1 July 2021 for bonds and from 1 October 2021 (1 July 2021 in Singapore3) for derivatives, unless the derivatives are used for risk management purposes.

Issuance of new contracts referencing SOR or SIBOR

In line with the Singapore Steering Committee for SOR & SIBOR Transition to SORA’s recommendations, since 1 May 2021, HSBC has stopped offering loans based on the Singapore Dollar Swap Offer Rate (SOR), unless they mature in 2021.

Until 30 September 2021, HSBC will offer the Singapore Overnight Rate Average (SORA) in arrears alongside the Singapore Interbank Offered Rate (SIBOR) for Lending facilities, and Overnight SORA alongside SIBOR for Trade facilities. We will stop offering SIBOR from 1 October 2021.

From 1 October 2021, HSBC will offer new derivatives contracts based on SORA instead of SOR, where available, unless they are entered into for risk management purposes or to transition from legacy SOR positions.

Further information on hedging products

It is important that you assess how LIBOR is used in all your financial products and services with HSBC and/or any other party. In relation to loan products, for example, the anticipated changes may have an impact on the effectiveness of any derivative transactions that are used to hedge the cashflows of such loans. You should consult with your professional advisers on these changes as they can give rise to potential mismatches between loans and derivatives, and they may also affect any hedge accounting treatment applicable to those products.

On 23 October 2020, the International Swaps and Derivatives Association (‘ISDA’) launched a supplement to the 2006 ISDA Definitions (the ‘IBOR Fallbacks Supplement’) and the ISDA 2020 IBOR Fallbacks Protocol (the ‘IBOR Fallbacks Protocol’). These documents took effect on 25 January 2021.

This will enable parties to include new triggers and fallbacks dealing with the permanent or indefinite cessation and non-representativeness of LIBOR (ISDA Triggers and Fallbacks) in derivative contracts.

Visit our ISDA IBOR Fallbacks dedicated section for more information.

If you do intend to adhere to the IBOR Fallbacks Protocol, we encourage you to consider that, for derivative transactions that were entered into to hedge specific assets or liabilities, such as loans, the ISDA Triggers and Fallbacks may differ from loan triggers and fallbacks. This could result in the derivative no longer being an effective hedge for the underlying loan without a subsequent amendment to the derivative transaction.

The fallbacks in the IBOR Fallbacks Protocol will apply if LIBOR ceases to be provided permanently or indefinitely or if it is found to be non-representative. If an underlying loan is actively transitioned to an RFR, a mismatch could be created between the loan and the hedging derivative and so you may want to consider transitioning the loan and the hedging derivative at the same time.

As adherence to the IBOR Fallbacks Protocol has the effect of an amendment, if there are any consents required to amend any of your derivative transactions, you will need to have obtained these consents prior to your adherence.

HSBC clients should seek guidance from their professional advisors on the possible implications of the changes outlined in this article on their business including financial, legal, accounting and tax impacts. HSBC does not, through this page, provide any advice or recommendation or product offering, nor does it assume any responsibility to provide advice.

What could these reforms mean for HSBC clients?

These changes may impact the HSBC products and services you currently use and those we provide in the future. The extent of the impact will depend on a range of factors including the following:

  • which IBOR is referenced;
  • the nature of the "fallback" provisions, where the product includes such provisions (for example, the ISDA Benchmarks Supplement may be incorporated in your derivatives transactions);
  • the adjustment for credit and term differences (i.e. between the IBOR and the alternative near risk-free rate) defined by industry working groups;
  • the term of the product or contract;
  • the date when the changes will take effect; and
  • the nature of the product.

The reforms could have a number of impacts on clients. These impacts include possible changes to contractual documentation, adaption of operational processes/IT systems, changes to the value of products or the possibility of products no longer serving the purpose for which they were intended. Depending on the factors listed above, by way of example, the discontinuation of an IBOR referenced in a loan facility and its replacement by an agreed alternative benchmark may result in changes to the amount payable under the facility. Any changes in the amount payable will be clearly communicated to you.

The impact of the changes may also vary depending on whether the relevant benchmark is being discontinued or if it is being reformed. For example, in the case of any transaction referencing EURIBOR, the European Money Markets Institute (the administrator of EURIBOR) is changing the way in which it determines EURIBOR. This change could result in EURIBOR being higher or lower than would be the case if it were to be determined using the previous methodology.

We are actively monitoring developments and participating in a number of industry and regulatory working groups. HSBC will continue to provide more information on the changes, notably when there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.

The changes may impact products and services in a number of ways and the information provided on this page cannot be, and is not, exhaustive. You should contact your professional advisors on the possible impact of the IBOR reforms on the financial products and services you use or may use in the future.

For more information

We will periodically update this page and provide communications relating to the changes. In the meantime, if you require any further information, please contact your usual Relationship Manager. HSBC may also provide you with product or service specific information which you should consider carefully. The Frequently Asked Questions below attempt to clarify some of the key IBOR reform themes.

 

If you would like more general information on interest rate reform and IBOR transition, the Financial Conduct Authority (FCA), the Bank of England, the U.S. Commodity Futures and Trading Commission (CFTC), the Federal Reserve Bank of New York (FRBNY), the U.S. Alternative Reference Rates Committee (ARRC), the European Central Bank (ECB), the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and some of the working groups and industry bodies that are considering these issues have published information which can be found on their websites.

 

Frequently Asked Questions

 

You may wish to seek guidance from your professional advisors on the possible implications of the changes outlined on this page on your business including financial, legal, accounting and tax impacts. The content of this page is for general information only and on a strictly non-advised basis. It does not constitute any form of advice or recommendation, nor does it represent an exhaustive description of the impact, likelihood or consequences of any particular option or any particular risk applying to you or any of your contracts. HSBC is not your advisor and does not through this page or otherwise provide any advice or recommendation or product offering, nor does it assume any responsibility to provide advice.

Last updated: 15 July 2021