IBOR Reforms

Regulatory authorities and RFR working groups comprising public and private sector representatives in several jurisdictions, including the US, UK, Europe, Switzerland, Japan and Singapore (amongst others), have identified replacement benchmarks, and have developed strategies for transition, as shown in the table below:

The table above is not exhaustive and is provided for general information purposes only. Alternative rates other than those above may also be considered depending on products and currencies.

• Most RFRs are backward-looking overnight rates which are calculated by reference to historic transaction data and are published on an overnight basis. They are administered by the central bank in the relevant jurisdiction. The IBORs are calculated by reference to daily submissions by panel banks. These daily submissions are often based on forward-looking estimates by the panel banks, whereas most replacement benchmark rates will be based on actual historic transactions.
• Financial products using overnight rates either explicitly or implicitly use some kind of average of the overnight rate and not a single day’s reading of the rate in order to reduce the frequency of payments. Using an average of a series of overnight rates still accurately reflects movements over a given interest period. This is different to the IBORs which were forward-looking term rates (i.e. they were published in advance for seven interest periods ranging from overnight to 12 months).
• Forward looking Term RFRs, which would allow to be fixed and available at the beginning of each interest period and quoted for a range of different maturities, 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 sufficiently 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.
• Forward-looking Term SONIA is being published and made available in the market since January 2021 when ICE Benchmark Administration and Refinitiv finalised their methodologies and launched their respective term SONIA benchmarks. Both benchmarks are available in 1-month, 3-month, 6-month and 12-month tenors.
• In April 2021 QUICK Benchmarks Inc. began publishing production rates for the Tokyo Term Risk Free Rate (TORF).
• On 29 July 2021 the Alternative Reference Rates Committee (ARRC) formally recommended forward-looking SOFR term rates, which are administered by the CME Group, for use in certain products.

These developments are regarded as important milestones because term RFRs can provide certainty for calculating interest payments and other contractual payments in advance, which may be important for some products and market participants. 

• HSBC has participated in a number of public and private sector working groups such as the Sterling Risk-Free Rate Working Group, the Alternative Reference Rates Committee in the United States and the Working Group on Euro Risk-Free Rates, each of which was responsible for identifying the preferred near risk-free rate for the relevant currency, and supporting the transition away from LIBOR rates. HSBC has also participated in industry body working groups such as the International Swaps and Derivatives Association, Inc. (ISDA) working groups on the IBORs and the EU Benchmark Regulation (BMR) to ensure our approach is aligned with industry practice.
• HSBC is aware that the discontinuation of LIBOR or other IBORs may have impacted both its new and existing products and services and that the impact on clients, including other relevant parties, had to be carefully considered.
• The majority of LIBOR-referencing products have already been successfully transitioned. We have conducted due diligence to assess how LIBOR and other IBORs are used in HSBC products and services and, where applicable, we have engaged with our clients to facilitate the transition to an alternative rate upon LIBOR cessation.
• We have also enhanced our offering to make the products based on alternative reference rates available for our clients. The availability of these products will vary per currency, depending on the regulatory and industry developments. We have also monitored the transition plans of our third party product manufacturers to ensure that we remain compliant with the regulatory and industry recommendations.