The Future of LIBOR - Frequently Asked Questions (FAQ)
The purpose of this document is to provide information to the customers of Bank of Hope (“BOH”) regarding the likely discontinuation of LIBOR and to outline key aspects of this forthcoming change. The information provided is for informational purposes only, and it is not complete or exhaustive and does not constitute legal or regulatory advice. BOH is not providing any advice or recommendation; if you wish to receive advice you should obtain your own independent professional advice on the potential impact of interest rate reform, including LIBOR discontinuation, on your business.
What is LIBOR?
The London Interbank Offered Rate or "LIBOR" is an interest rate benchmark administered by ICE Benchmark Administration Limited.
LIBOR is a widely used benchmark for short-term interest rates, providing an indication of the average rates at which certain banks (referred to as LIBOR “panel banks”) could borrow from other banks on an unsecured basis for set periods of time and in particular currencies.
LIBOR is often referenced in loan, derivative and bond documentation, as well as in other types of documentation, to calculate interest payments under those products. It is also used for other purposes in the market such as, for instance, as a performance target or benchmark for funds, to value certain products, to calculate discount rates or performance ratios, to assess market expectation regarding central bank interest rates and liquidity in the interbank lending market and, during periods of stress, as an indicator of the health of the banking system.
LIBOR is currently produced for five currencies, Swiss franc, Euro, Pound sterling, Japanese yen, and United States dollar (“USD”), and seven tenors or time periods, Overnight/Spot Next, 1 Week, 1 Month, 2 Months, 3 Months, 6 Months and 12 Months. It is based on submissions from panel banks, which indicate the rate at which they could borrow from other banks, resulting in the publication of 35 rates across tenors and currencies every applicable London business day.
Further information about LIBOR is available at: https://www.theice.com/iba/libor.
Why is it changing?
The integrity of LIBOR was called into question during the height of the financial crisis when several banks contributing to its calculation were accused of manipulation of the rate. There followed a contraction in the unsecured interbank lending market, and the future of LIBOR was placed in doubt.
In 2014, the Financial Stability Board published a report explaining that benchmarks, such as LIBOR, should be based on actual transactions to the greatest extent possible. Certain changes were therefore made to the way in which LIBOR is calculated to try and base it on transactions to a greater extent but, because there are now fewer banks lending to each other on an unsecured basis, LIBOR is often calculated by reference to “expert judgement” by panel banks (i.e., estimates regarding how much they think it would cost them to borrow from other banks).
When will USD LIBOR be phased out?
On March 5, 2021, the ICE Benchmark Administration stated that feedback on its December 2020 consultation confirmed its proposed dates to stop publishing USD LIBOR on a representative basis. Specifically, the UK Financial Conduct Authority announced that the publication of LIBOR on a representative basis will cease for the one-week and two-month USD LIBOR settings immediately after December 31, 2021, and the remaining USD LIBOR settings immediately after June 30, 2023.
What impact will this change have?
Given that USD LIBOR is widely used, including in some of BOH’s products, this change may impact (amongst other things) products you currently have or obtain in the future, as well as your tax and accounting treatment. If you wish to receive advice on any aspect of LIBOR and/or alternative reference rates (“ARRs”) as may affect your products with BOH or otherwise, you should seek independent professional advice on that. BOH is not providing any advice or recommendation to you nor is it assuming any responsibility to provide advice.
What might be the impact on loans and what is happening to loan documentation?
Loan documentation generally also includes some fallback provisions which apply if LIBOR is discontinued but, as with derivatives, some of these provisions have in the past generally not been intended to deal with a permanent discontinuation of LIBOR. The Alternative Reference Rate Committee (“ARRC”), is the group convened by the Federal Reserve of New York and tasked with selecting the benchmark interest rate to replace USD LIBOR and provide other market guidance through this transition such as suggested fallback language for loans. These fallback provisions are intended to facilitate amendments to be made upon the occurrence of certain events (including permanent discontinuation of LIBOR, the designation of a replacement rate and/or a determination that a successor rate has generally been accepted in the international or any relevant domestic market). BOH has incorporated some form of fallback provisions in its loans for many years and is currently reviewing and updating fallback provisions in its loan documents to facilitate the transition away from USD LIBOR. Additionally, mismatches may arise if a derivative is used to hedge a loan which does not deal with USD LIBOR discontinuation in the same way as the related derivative contract. BOH will communicate with its customers and counterparties with a view to facilitating a smooth transition away from USD LIBOR for all product categories.
Further information about the ARRC is available at https://newyorkfed.org/arrc.
How is BOH preparing for the transition away from USD LIBOR?
BOH is preparing for the discontinuation of USD LIBOR and the transition to ARRs by November 1, 2021.
BOH is engaging with its customers and counterparties to raise awareness on the consequences of the discontinuation of USD LIBOR.
BOH is assessing how and where USD LIBOR is used in its products.
BOH will endeavor to contact, for information purposes only, those clients and counterparties in relation to affected products.
Where BOH considers it to be appropriate in light of industry developments, BOH is including more robust fallback language, if necessary, in new contracts that reference a USD LIBOR rate, addressing the consequences of the discontinuance of USD LIBOR and providing for potential amendments and/or for a replacement rate to be designated upon the occurrence of certain events regarding the USD LIBOR rate.
BOH is developing products that reference ARRs with a view to being able to offer a broader range of these products prior to the discontinuation of USD LIBOR.
What should you do now?
You should consider the impact of USD LIBOR discontinuation on you or your business. You should also consider obtaining independent professional advice on the impact of interest rate reform, including USD LIBOR.
If I have any further questions relating to the discontinuation of USD LIBOR who can I contact?
For any queries relating to the discontinuation of USD LIBOR, please direct them to your Relationship Manager or contact LIBORquestions@bankofhope.com.