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) have been or are being reformed.

The financial services industry has commenced the transition towards ‘Risk-Free Rates’ also known as ‘Near Risk-Free Rates’ (“RFRs”)1 and other alternative rates.

The following rates have ceased to be published or are no longer representative as of 31 December 2021:

  • Sterling2, Euro, Swiss Franc, and Japanese Yen2 LIBOR settings in all tenors
  • US Dollar LIBOR 1-week and 2-month settings

EONIA has ceased to be published on 3 January 2022.

The following rates will either cease or no longer be representative immediately after 30 June 2023:

  • US Dollar LIBOR Overnight, 1-month3, 3-month3, 6-month3 and 12-month settings.
  • SOR, THBFIX and MIFOR will also be impacted because these benchmarks use USD LIBOR as an input. Our dedicated Asia-Pacific page provides further information.

IBOR reforms 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 understanding of the reforms as at 3 May 2022. It is not exhaustive and does not constitute any form of advice or recommendation. You should contact your professional advisors about the possible implications of the changes such as financial, legal, accountancy or tax consequences. Please read the content of this page carefully, together with any other communications you may have received from HSBC. Please contact us if you wish to discuss any of these changes further.

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

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

In 2014, the Financial Stability Board (FSB) recommended a reform of IBORs and their replacement by RFRs that are based on more active and liquid overnight lending markets.

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).

What are the replacement benchmarks and which benchmarks have changed?

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 (RFRWG), the Working Group on Euro Risk-Free Rates, and the Alternative Reference Rates Committee (ARRC), have identified and recommended alternative benchmark rates and best practice to support the transition of IBORs to these alternatives.

The table below sets out examples of benchmarks that have been or will be replaced or modified.

The dedicated Asia-Pacific page provides an overview of some of the benchmark reforms in Australia, China, Hong Kong, India, Japan, Korea, Malaysia, Philippines, Singapore and Thailand.

Currency

IBOR

Alternate RFR

Transition Approach

US Dollar (USD)

USD LIBOR

Secured Overnight Financing Rate (SOFR).

Transition to SOFR.

US Dollar LIBOR 1-week and 2-month settings ceased on 31 December 2021; US Dollar Overnight, 1-month, 3-month, 6-month and 12-month settings will cease on 30 June 2023.

Sterling (GBP)

GBP LIBOR

Sterling Overnight Index Average (SONIA).

Transition to SONIA.

GBP LIBOR ceased on 31 December 20212

Euro (EUR)

Euro Overnight Index Average (EONIA)

Euro Short-Term Rate (€STR).

Transition to €STR. EONIA was discontinued on 3 January 2022.

Euro (EUR)

Euro Interbank Offered Rate (EURIBOR)

€STR.

EURIBOR methodology was reformed in 2019 and no indication has been given that EURIBOR is likely to cease in the near future.

In November 2019 the Working Group on Euro Risk-Free Rates set out high-level recommendations for the inclusion of fallback provisions in cash products and derivative contracts referencing EURIBOR.

Euro (EUR)

Euro LIBOR

€STR.

Transition to €STR.

Swiss Franc (CHF)

CHF LIBOR

Swiss Average Rate Overnight (SARON).

Transition to SARON.

SARON is a pre-existing rate that was recommended as the alternative to CHF LIBOR in October 2017. CHF LIBOR ceased on 31 December 2021.

Canadian Dollar (CAD)

Canadian Dollar Offered Rate (CDOR)

An updated version of the Canadian Overnight Repo Rate Average (CORRA), a pre-existing rate.

The Bank of Canada's Canadian Alternative Reference Rate Working Group (CARR) has recommended ceasing the calculation and publication of CDOR’s remaining tenors (1, 2 and 3 month) after 30 June 2024.

Publication of the 6 and 12 month CDOR tenors ceased in May 2021.

On 31 January 2022, Refinitiv Benchmark Services UK Limited (who administers CDOR) issued a consultation on the potential cessation of CDOR.

Japanese Yen (JPY)

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

Tokyo Overnight Average Rate (TONA also known as TONAR) is the alternative RFR for Japanese Yen.

Reforms to TIBOR.

Japan is implementing a multi-rate approach with TONAR being promoted where appropriate, while the TIBOR reforms should ensure that JPY TIBOR can continue to be used.

More detail on the dedicated Asia-Pacific page

 

The table above is not exhaustive and is provided for general information purposes only. Other benchmarks may be discontinued or their methodology may be modified.

Some of the differences between IBORs and RFRs

LIBOR and most other IBORs were intended to measure unsecured interbank lending rates and therefore included or implied an inter-bank credit premium.

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). Due to their overnight and near risk free nature, RFRs do not include a credit premium.

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. IBORs therefore incorporate a term premium to compensate for the risk of default over the term for which they are 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.

Forward looking Term RFRs are now available albeit not for all products as there may be regulatory restrictions to their use (e.g. Term SONIA) and not for all currencies, particularly those where there is no active and liquid derivatives market (e.g. CHF SARON).

Term RFRs provide an indicative, forward-looking measurement of RFR rates, based on market expectations implied from relevant RFR derivatives markets. They include expectations of future level of interest rates but do not include any interbank credit premium.

Due to these differences, adjustments for credit and term differences may need to be used to transition existing contracts and agreements that reference IBORs to RFRs.

Changes to HSBC’s product offering to comply with IBOR Transition regulatory and industry milestones

In line with regulatory guidance and industry working groups’ recommendations, we have modified our IBOR-based product offering for new or refinanced lending (“Lending”) facilities, new or renewed trade and export finance (“Trade”) facilities and new derivatives. Note that the information below reflects our current approach where we are the sole lender or the lead arranger in a syndicated facility.

The dedicated Asia-Pacific page provides an overview of the changes to HSBC’s product offering in Australia, China, Hong Kong, India, Japan, Korea, Malaysia, Philippines, Singapore and Thailand.

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.

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 not to enter into new transactions referencing USD LIBOR after 31 December 2021 unless they are derivatives used for market making or for existing LIBOR-based exposure hedging.

Following this U.S. regulators’ supervisory guidance, HSBC has ceased offering Lending and/or Trade facilities based on USD LIBOR when they are new contracts or amendments to existing USD LIBOR contracts that create an additional USD LIBOR exposure or extend the term of the existing facility.

HSBC can offer Term SOFR or simple or compounded SOFR in arrears for Lending facilities and Term SOFR or Overnight SOFR for Trade facilities, where such SOFR rates are available.

Drawdowns on committed USD LIBOR based contracts entered into on or before 31 December 2021 are allowed to continue utilising the facility until the maturity date, provided such date is before 30 June 2023. Contracts that mature after 30 June 2023 will be either be actively transitioned to SOFR or another alternative reference rate on or before that date or, where appropriate, will transition on 30 June 2023 per the fallback language included in the contract.

Uncommitted USD LIBOR based contracts entered into on or before 31 December 2021 will be actively transitioned to SOFR or another alternative reference rate at the earliest available opportunity.

The use of USD LIBOR for new derivatives after 31 December 2021 is only allowed for the following activities:

  • Transactions that reduce or hedge the supervised entity’s or any client of the supervised entity’s US dollar LIBOR exposure on contracts entered into before 1 January 2022.
  • Novations of US dollar LIBOR transactions executed before 1 January 2022.
  • Market making in support of client activity related to US dollar LIBOR transactions executed before 1 January 2022.
  • Transactions executed for the purposes of participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting US dollar LIBOR exposure.

Additionally, the Financial Conduct Authority (FCA), the United Kingdom regulator, authorises the use of USD LIBOR for interpolation or other use provided for in contractual fallback arrangements in connection with the US dollar LIBOR 1-week and 2-month settings that have ceased to be published on 31 December 2021.

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

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 has been doing the same for non-linear derivatives such as caps, floors, and swaptions since 1 July 2021.

Issuance of new contracts referencing EUR LIBOR

Since 1 April 2021, HSBC has been offering Lending and Trade facilities based on EURIBOR, €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.

HSBC offers EURIBOR or €STR instead of EUR LIBOR for bonds and derivatives.

Following the Working Group on Euro Risk-Free Rates’ recommendations on EURIBOR new trigger events and €STR-based fallback rates, HSBC’s European entities include these in EURIBOR Lending and Trade facilities.

Issuance of new contracts referencing CHF LIBOR

HSBC can offer Lending and Trade facilities based on 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.

HSBC offers 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 has offered Lending and Trade facilities based on the Tokyo Overnight Average rate (TONA) in arrears, Overnight TONA or TIBOR instead of JPY LIBOR, depending on the product, jurisdiction and subject to eligibility criteria.

HSBC will continue to assess the development and adoption of TORF and will consider offering this rate where there is demand from customers who prefer a rate set in advance and who prefer TORF to TIBOR.

Since 1 July 2021, HSBC has been offering TONA or other alternatives instead of JPY LIBOR for bonds and derivatives, where available and subject to eligibility criteria.

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 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, ISDA finalised a supplement to the 2006 ISDA Definitions (the ‘ISDA IBOR Fallbacks Supplement’) and published the ISDA 2020 IBOR Fallbacks Protocol (the ‘ISDA IBOR Protocol’). They both took effect on 25 January 2021.

The ISDA IBOR Supplement includes new contractual fallback provisions that will take effect for derivatives contracts referencing in-scope IBOR rates upon certain index cessation events (‘ISDA Triggers and Fallbacks’). This will enable parties to include these ISDA Triggers and Fallbacks in their derivative contracts.

Visit our ISDA Fallbacks dedicated section for more information.

If you do intend to adhere or you have already adhered to the ISDA IBOR 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.

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

What could these IBOR reforms mean for HSBC clients?

These reforms 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 but not limited to the following:

  • which IBOR is referenced;
  • whether the relevant benchmark is being discontinued or if it has been, or is in the process of, being reformed;
  • 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 regulatory reform, product or contractual changes will take effect; and
  • the nature of the product.

The reforms could impact you in a number of ways, including 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.

HSBC is actively monitoring developments and participating in a number of industry and regulatory working groups. HSBC will continue to provide more information on the changes as they become known at industry level.

For more information

We will periodically update this page and provide communications relating to the changes. If you require any further information or have any questions, please contact your Relationship Manager. HSBC may also provide you with product or service specific information which you should consider carefully.

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.

You should contact your professional advisors about the possible implications of the changes including those outlined on this page such as financial, legal, accounting and tax consequences. 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.

 

1RFRs are overnight rates based on actual transactions and reflect the average of the interest rates that certain financial institutions pay to borrow overnight on an unsecured basis from wholesale market participants (for unsecured RFRs, such as SONIA) or the average rate paid on secured overnight repurchase or “repo” transactions (for secured RFRs, such as 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 and can rise or fall as a result of changing economic conditions and central bank policy decisions.

2Furthermore, the United Kingdom’s Financial Conduct Authority (FCA) is using new powers introduced into the UK Benchmarks Regulation by the Financial Services Act 2021 to require ICE Benchmark Administration (IBA), the administrator of LIBOR, to continue publishing one-month, three-month and six-month sterling LIBOR and one-month, three-month and six-month yen LIBOR on a synthetic basis for an additional year after end-2021 (after which synthetic yen LIBOR is expected to stop being published and the need to continue publication of synthetic sterling LIBOR will be reviewed). Importantly, the FCA confirmed the sterling and yen LIBOR tenors would no longer be representative of their underlying market after December 31, 2021. The FCA has published a notice which confirms that, while use of synthetic LIBOR by UK regulated firms will be prohibited for new transactions from January 1, 2022, use of synthetic LIBOR by regulated firms will be permitted for all legacy products other than cleared derivatives until at least the end of 2022. The FCA have continually emphasised that market participants must continue to actively transition their contracts away from LIBOR (notwithstanding the publication of synthetic rates) and that it must not be assumed that synthetic Sterling LIBOR will be available after the end of 2022.

3The FCA has stated that it will consider the case for requiring IBA to continue publishing one-month, three-month and six-month US dollar LIBOR on a non-representative and synthetic basis for a further period after the end of June 2023. The FCA has prohibited the use by UK supervised entities of all five continuing USD LIBOR tenors in new transactions with effect from 1 January, 2022, except for certain limited and specific exemptions – for example, to facilitate risk management or reduction of exposures incurred prior to 1 January 2022.

4Clients should consider the particular challenges of hedging Base Rate lending facility risks with a vanilla or floored interest rate swap, or a cap.

Last updated: 10 May 2022