Welcome to KPMG’s latest issue of our monthly LIBOR newsletter in which we provide updates on LIBOR and other benchmark interest rate developments that directly impact banks and consider the potential implications of the related regulatory requirements.
中国人民银行于2021年6月1日召开了市场利率定价自律机制工作会议，并于会上发布了三份境内美元浮动利率贷款的推荐协议文本，分别适用于新签订参考美元伦敦银行间同业拆借利率（LIBOR）的合约、存量参考美元 LIBOR 的合约和新签订参考有担保隔夜融资利率（SOFR）的合约。会议明确，自即日起，各金融机构可参考该协议文本签订美元浮动利率贷款合约，也可结合实际情况，对推荐的协议文本内容进行适应性调整。在相应 LIBOR 品种停止报价或失去代表性前，各金融机构应停止新签或续签以该 LIBOR 品种为定价基准的合约，并最晚于相应 LIBOR 品种停止报价或失去代表性后的第一个重定价日签订存量贷款补充协议。非美元币种浮动利率贷款合约，各金融机构可结合货币发行经济体监管部门的推荐及自身业务实际情况参照执行。
毕马威观点: 中国人民银行此次会议发布的境内新签订美元 LIBOR 浮动利率贷款合同定价基准转换相关条款对定价基准转换相关事项进行了具体约定。替代基准利率以瀑布法则的方式确定，优先采用美国替代基准利率委员会（ARRC）推荐的 SOFR 期限利率（若有），其次按 SOFR 逐日计息，最后为开放式约定选项。同时，若定价基准转换为按 SOFR 逐日计息，相关条款也明确建议参考 ARRC 推荐使用 T-5 的利率确认方式，即在利率确定日适用5个工作日前的定价基准。
2. FCA and BoE encourage switching to SONIA in the sterling exchange traded derivatives market from 17 June
Following the key transition milestone set out by the Working Group on Sterling Risk-Free Reference Rates to cease the initiation of new GBP LIBOR exchange traded derivatives expiring after 2021 by the end of Q2 2021, as well as close engagement with market participants, the Financial Conduct Authority (FCA) and the Bank of England (BoE) encourage market users and liquidity providers to shift their default trading conventions for exchange traded derivatives from GBP LIBOR to SONIA from 17 June 2021. FCA and BoE will communicate with market participants between now and 17 June to assess whether the switch could be proceeded smoothly under the current market conditions. This recommendation also aligns with a similar change to the interdealer quoting convention for linear sterling swaps which took place during Q4 2020, the change on the exchange traded derivatives convention is expected to increase alignment in sterling markets and contribute to the acceleration of reducing new LIBOR exposures.
KPMG’s perspective: According to the new milestone announced by FCA and BoE, AIs should be prepared to take necessary procedures to implement SONIA as the default traded instrument for exchange traded derivatives from 17 June 2021 if not already done so. Market participants should also consider SONIA derivatives as the appropriate market convention for most contracts in particular for those with maturity after 2021. The proposed changes would not restrict transactions of GBP LIBOR exchange traded derivatives, as this benchmark will remain available until later in 2021 to facilitate risk management of existing positions. However it is expected that the market liquidity of SONIA would be improved as SONIA would gradually become the primary source of liquidity.
13 May 2021, FCA
The American Financial Exchange (AFX) has signed an agreement with Numerix to publish spot AMERIBOR term structure interest rates. The rate would be constructed by the AMERIBOR overnight unsecured AMERIBOR cash rate and implied forward rates from AMERIBOR futures prices by using Numerix’s yield curve algorithm and proprietary software. AMERIBOR currently provides the only exchanged-traded and regulated credit-sensitive overnight lending benchmark specifically intended to track activity in the unsecured lending market. The new AMERIBOR spot term structure would allow market participants to issue AMERIBOR-referenced commercial loans, notes and derivatives with a rate structure similar to LIBOR.
KPMG’s perspective: AMERIBOR is another alternative benchmark rate as a separate and distinct benchmark that reflects the actual borrowing costs of the thousands of banks across America which do not borrow at either LIBOR or SOFR to fund their balance sheets. Short- and long-term borrowers and lenders in the US market can have the option to the new AMERIBOR spot term structure of interest rates for insights on the funding costs and enhancing transparency and liquidity in the unsecured lending market. The increase in choices of alternative reference rates could be seen as a good indicator for positive market progress in transitioning away from LIBOR and adopting the use of alternative benchmark rates.
25 May 2021, AFX
2. ARRC issued update on its RFP process in selecting the administrator of a forward-looking SOFR Term Rate
The Alternative Reference Rates Committee (ARRC) announced the selection of CME Group as the administrator for the recommendation of a forward-looking SOFR term rate once the market indicators for the term rate are fulfilled. Together with other preparation work by the ARRC towards publishing a final recommendation of a SOFR term rate, the ARRC also plans to recommend best practices for the use of the term rate, for example as a fallback rate for legacy LIBOR-linked cash products and in new loans where the borrowers may have difficulty in coping with the new environment.
KPMG’s perspective: The announcement in conjunction with the term rate principles and term rate market indicators previously issued by ARRC provides clearer industry guidance on the use of a forward-looking SOFR term rate. It is expected that the ARRC may finalize its recommendations and best practices on the scope of use of the SOFR-based term rate in the near future, AIs should keep an eye on any upcoming term SOFR rates regulated by CME Group regarding the usage of the SOFR term rate. In the meantime, it is worth reiterating the previous announcement published by the ARRC – market participants should not rely on the SOFR term rates for the transition. Banks should continue to adopt SOFR in arrears as the main vehicle for the transition and consider the key principles set out by ARRC while planning for the use of SOFR term rates during and post LIBOR transition.
21 May 2021, ARRC
3. FCA consults on the use of new LIBOR transition powers
The Financial Conduct Authority (FCA) has published a consultation about its planned policy framework to exercise its new powers under the Benchmarks Regulation, to wind down significant interest rate benchmarks including LIBOR in an orderly manner. In the new consultation, factors that FCA found relevant in deciding whether an interest rate benchmark that already become permanently unrepresentative could be used in tough legacy contract would be set out, together with the FCA’s proposed approach on how to limit the use of a critical benchmark in new contracts, especially for most USD LIBOR settings which publication will continue until mid-2023. The FCA will have another round of consultation in Q3 2021 on the use of synthetic LIBOR and how to restrict the use of LIBOR rates in new contracts. These arrangements would be finalized in Q4 2021 based on the FCA’s expectation.
KPMG’s perspective: As the FCA has started the consultation on the approach to phase out the use of LIBOR steadily, market participants are expected to have more reference and guidance on the arrangement for tough legacy contracts where contract amendment and re-negotiation may face particular difficulties. Given that the FCA would also collect feedback on the plan to restrict new use of LIBOR rates after the designated LIBOR cessation date, Banks are encouraged to be in a position to issue new-ARR referenced product before the statutory timeline to allow more time to prepare for the operation and implementation of the new products. It is also important for Banks to start planning the migration of legacy LIBOR exposures at an early stage as the synthetic LIBOR are not intended to be a permanent solution for legacy transition.
20 May 2021, FCA
4. ARRC issues guidance on publishing SOFR Averages
The Alternative Reference Rates Committee (ARRC) released a Guide to Published SOFR Averages, which specifically focused on the New York Fed-published SOFR Averages to provide market participants with key information for the LIBOR transition. Serving as a complementary document for the ARRC’s webinars which discussed loan market developments, SOFR and term rates, the Guide covers important clarifications on how the published SOFR Averages could be used in financial products and the factors that market participants should consider before selecting an appropriate alternative rate. It also summarizes the ARRC’s conventions in using SOFR Averages for securitizations, student loans and intercompany loans.
KPMG’s perspective: With less than a year remaining before the designated LIBOR cessation timeline, market participants should start educating borrowers on the use of SOFR Averages before the market can no longer issue new LIBOR-referenced products. Banks can make use of this Guide as an introductory material to borrowers with respect to the key features of SOFR Averages, market conventions and calculation methodology for simple and compounded SOFR Averages. Banks are also recommended to clarify the key impacts on the borrowers relevant to their existing LIBOR exposures to help borrowers explore all available options prior to the transition. Market participants can also refer to the User’s Guide to SOFR to have an in-depth understanding of the usage of SOFR Averages. It is important for Banks to bear in mind and set out a clear plan for essential customer communication and education to prevent potential conduct risk from arising during the transition stage.
11 May 2021, ARRC
5. IBA consults on the potential cessation of GBP LIBOR ICE Swap Rate
The ICE Benchmark Administration (IBA) published a consultation regarding its intention to cease the publication of GBP LIBOR ICE Swap Rate settings from all tenors (from 1 to 30 years) immediately after publication on 31 December 2021, as a result of IBA not having access to input the necessary data to calculate 3 Month and 6 Month GBP LIBOR settings on a representative basis after 31 December 2021 as announced in the previous IBA statement. The consultation would collect market participants’ feedback on the proposed cessation timeline of GBP LIBOR ICE Swap Rate, as well as comments on the process and timing for the potential cessation of USD LIBOR ICE Swap Rate.
KPMG’s perspective: The IBA proposed cessation timeline for the GBP LIBOR ICE Swap Rate indicates that market participants should start to prepare for its transition to the GBP SONIA ICE Swap Rate following the same timeline as the SONIA transition by the end of the year. It is also possible that IBA may soon propose similar consultation for the arrangements on the USD LIBOR ICE Swap Rate, as USD LIBOR would also cease to be published according to their tenors by the end of 2021 and end-June 2023 respectively. If Banks have relevant exposure referencing the GBP LIBOR ICE Swap Rate, they should plan ahead to switch to the GBP SONIA ICE Swap Rate following the bank-wide transition plan before the end of the year, and keep an eye on the upcoming announcements by the IBA on the finalised schedule.
7 May 2021, IBA
New Developments on Products and Pricing Strategy
1. CME Group to launch Futures referencing BSBY in Q3 2021
CME Group made an announcement on the launch of interest rate futures referencing the Bloomberg Short-Term Bank Yield Index (BSBY) and the new contracts would be available for trading in Q3 2021, followed by the OTC clearing of BSBY swaps currently under regulatory review which will be introduced in Q4 2021. The upcoming launch of BSBY futures aims to meet the increasing client need for credit-sensitive rates, and intends to act as a complement for SOFR-linked instruments including short-term interest rate futures and Term SOFR index products currently available at CME Group.
24 May 2021, CME Group
2. IBA launched GBP SONIA Spread-Adjusted ICE Swap Rate ‘Beta’ settings
The ICE Benchmark Administration (IBA) announced the launch of an initial beta version of its GBP SONIA Spread-Adjusted ICE Swap Rate in order to support the market transition for non-linear derivatives, cash market instruments and structured products currently referenced to GBP LIBOR ICE Swap Rate. According to IBA’s announcement, it has started publishing daily indicative GBP SONIA Spread-Adjusted ICE Swap Rate ‘Beta’ settings with tenors ranging from 1 to 30 years based on the methodology suggested by the Working Group on Sterling Risk-Free Reference Rates as set out in its previous paper.
17 May 2021, IBA
3. BofA and JPMorgan entered the first swaps trade linked to new LIBOR replacement
Bank of America Corp. (BofA) and JPMorgan Chase & Co. (JPMorgan) entered into the first swaps trade linked to the Bloomberg Short Term Bank Yield (BSBY) on 30 April 2021. The trade was a $250 million one-year basis swap with one side linked to BSBY and the other side tied to SOFR. By entering into the new swaps trade, BofA and JPMorgan signal their support for a credit-sensitive rate to be used alongside SOFR following BofA’s earlier issuance of a $1 billion 6-month floating-rate note referencing the one-month BSBY in April 2021.
3 May 2021, Bloomberg
KPMG’s perspective: The recent issuance of interest rate futures and swaps linked to the BSBY indicate increasing market demand for different credit-sensitive rates and growing progress in transitioning away from LIBOR while not affecting the wider adoption of SOFR. It is expected that the usage of BSBY index and other alternative rates could support the product development and enhancement of a wider variety of financial products alongside SOFR. Banks are encouraged to review different alternative benchmarks available and commonly used in the market to decide a suitable replacement benchmark for LIBOR as the LIBOR cessation date is soon approaching.