IBOR Reforms

Interest rates can be fixed or alternatively calculated by referencing benchmark rates. The London Interbank Offered Rate (LIBOR) is one of the most commonly used benchmarks for interest rates and is utilised in financial products such as derivatives, bonds, loans, structured products and mortgages. It often forms the basis on which interest payments under those products are calculated.

LIBOR is published on each London business day and is administered by ICE Benchmark Administration (IBA). It is based on quotations received from a group of LIBOR panel banks who provide information to IBA as to the amount it would cost them to borrow from other banks so that an average can be calculated and published.

LIBOR has been published in five currencies (Euro, Japanese Yen, Pound Sterling, Swiss Franc and US Dollar) and for seven interest periods (ranging from overnight to 12 months).

The issues centered on the perceived robustness of LIBOR (such as the lack of interbank lending transactions on which to base the rate) also affect other Interbank Offered Rates (IBORs) such as EURIBOR. The way in which EURIBOR is calculated has therefore been reformed and subsequently confirmed by the European Money Markets Institute (EMMI) to continue to exist for the foreseeable future. 

In the United States, the preferred replacement rate for USD LIBOR is the Secured Overnight Financing Rate (SOFR). To help this transition happen, a working group in the United States consisting of both private and public sector entities - known as the Alternative Reference Rates Committee (ARRC) - is planning, encouraging and supporting the changeover to SOFR.

In addition to the IBORs, other interest rate benchmarks are being looked at. For example, the Euro Overnight Index Average (EONIA) was discontinued at the end of 2021 and replaced by the Euro Short Term Rate (€STR), which is a new rate published since October 2019. 

Other rates are also being considered for revision across the world, including in Hong Kong, Singapore, Australia and Canada. 

The url link below will direct you to the LIBOR Risk Disclosure. This gives more information to those considering an investment product or a credit facility based on an IBOR rate which continues to be published after 2021. The document outlines the use of alternative interest rate benchmarks and the potential impact of these changes.

(1)   The rate published on 2 October 2019 was the rate for 1 October 2019 as €STR is published on a next-day basis.

(2)   In Q4 2020 SOFR replaced the Effective Federal Funds Rate (EFFR) as the rate used for discounting and Price Alignment Interest (PAI) in the cleared context.

Alternative rates other than above may also be considered depending on products and currencies.

• 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. 
• The 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. 
• 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). 
• There have been forward-looking term structures developed for certain RFRs, which would allow for them to be fixed and available at the beginning of each interest period and quoted for a range of different maturities.

•  Forward-looking Term SONIA has been 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. 

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. 

The url link below reveals the RFR Risk Disclosure outlining a number of potential impacts and key risks of entering into a product which references an RFR directly or indirectly.

¹ https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf

• So that we are part of the conversation and any actions, HSBC participates 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 is now encouraging and supporting the transition away from LIBOR rates.
• HSBC also participates 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). HSBC may participate in other industry working groups in the future, including those that are considering the impact of LIBOR replacement on specific types of products and services to ensure our approach is aligned with industry practice.
• HSBC is aware that the discontinuation of LIBOR or other IBORs may impact both its new and existing products and services and that the impact on clients, including other relevant parties, will need to be carefully considered. 
• We have conducted due diligence to assess how LIBOR and other IBORs are used in HSBC products and services. We have already included arrangements in our new LIBOR-referencing documents for credit facilities or investment products, where applicable, to facilitate the transition to an alternative rate upon LIBOR cessation. We have also started enhancing 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 are also monitoring the transition plans of our third party product manufacturers to ensure that we remain compliant with the regulatory and industry recommendations. 
• While HSBC’s internal preparations are well under way, we continue engaging with our clients where applicable, monitoring market developments and contributing to the discourse with regulatory authorities and industry bodies. 

These changes may impact the HSBC products and services you currently use and those we provide in the future, including changes to interest payment and other obligations. The extent of the impact will depend on a range of factors such as the IBOR referenced, the fallbacks (if any) in the contract, the date by when the changes will take effect and the nature of the product or service.

For example, following the permanent discontinuation of LIBOR and the adoption of an alternative benchmark for credit facilities, it is possible that the alternative benchmark may result in changes to the amount payable under the facility. The impact of the changes may also vary depending on whether the relevant benchmark is being discontinued or if it is being reformed. 

We are actively monitoring developments and are participating in industry and regulatory working groups. HSBC will continue to provide more detailed information to impacted clients once 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 your products and services in a number of ways, they also vary by currency and product type, and the information provided on this page cannot be, and is not, exhaustive.

Where required, we will continue to inform our clients of the changes on their affected products; however, we recommend that you stay aware of industry developments and consider the potential impact on your products.