Tag: LIBOR

Banks get RBI nod to use any other ARR in place of LIBOR

Banking & Finance

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The Reserve Bank of India (RBI) has permitted banks, which are authorised to deal in foreign exchange, to use any other widely accepted/alternative reference rate (ARR) in place of the London interbank offered rate (LIBOR) for interest payable in respect of export/import transactions.

The central bank has issued a circular in this regard to authorised dealer banks in view of the impending cessation of LIBOR as a benchmark rate.

RBI Governor Shaktikanta Das, in a statement on August 17, observed that the transition away from LIBOR is a significant event that poses certain challenges for banks and the financial system. “The Reserve Bank has been engaging with banks and market bodies to proactively take steps. The Reserve Bank has also issued advisories to ensure a smooth transition for regulated entities and financial markets,” Das said.

Also read: LIBOR transition will be a complex exercise

Banks will be permitted to extend export credit in foreign currency using any other widely accepted ARR in the currency concerned, he added. Since the change in reference rate from LIBOR is a “force majeure” event, banks are also being advised that change in reference rate from LIBOR/ LIBOR related benchmarks to an ARR will not be treated as restructuring, the Governor then said.

On June 8, 2021, the RBI had advised banks and other regulated entities to cease entering into new contracts that use LIBOR as a reference rate and instead adopt any ARR as soon as practicable and in any event by not later than December 31, 2021.

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RIL cuts term SOFR deal with JP Morgan, heralds a new era, BFSI News, ET BFSI

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Reliance Industries has cut a trade-financing deal with Wall Street bank JP Morgan using the Term SOFR (Secured Overnight Financing Rate), heralding a new era in loan-pricing benchmarks as the hitherto popular reference frame LIBOR is phased out after decades of international duty.

LIBOR is being replaced in phases by alternative rates for all loans and derivative deals starting January next year.

The financing deal was sealed at the bank’s overseas branch, likely in Singapore, and it involved discounting a Letter of Credit (LC). The amount involved was about $50 million.

Reliance is said to have obtained an LC from an Indian bank for procuring raw materials from the global market, three market sources familiar with the matter told ET. This LC will be discounted at a rate determined by SOFR Term rate with maturity running between two and three months.

“The financing will be provided by JP Morgan at the SOFR Term Rate,” said one of the persons cited above.

The SOFR Term rate, with a three-month maturity, yields 0.05043 percent.

Officials at Reliance and JP Morgan did not comment on the matter untill publication of this report.

“With a transition away from the LIBOR benchmark now inevitable, Indian users will have to start getting familiar with alternative reference benchmarks such as SOFR,” said Ananth Narayan, associate professor at the SP JAIN Institute of Management. “Larger corporates and banks leading the way in this transition is actually a good sign.”

CME group, the world’s largest derivative exchange, got the approval from the Alternative Reference Rates Committee (ARRC) to launch SOFR Term rates end-July.

“We…have been delivering robust, forward-looking SOFR term rates to the industry, based on our deep and liquid underlying CME SOFR futures market, since September 2020,” said Sean Tully, CME Group Global Head of Financial and OTC Products, in a statement.

SOFR is a benchmark rate administered by the Federal Reserve Bank of New York, which has been selected to replace dollar-denominated LIBOR. SOFR is reportedly based on overnight transactions in the US Treasury repo market.

Nearly two months ago, India’s central bank warned banks and financial institutions against structuring deals linked to LIBOR.

In its bi-monthly monetary policy RBI relaxed norms to facilitate the financial industry’s migration to alternative reference rates instead of LIBOR. It directed banks and borrowers to work a smooth transition.



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RBI advises banks to shift away from LIBOR to alternative reference rates

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The Reserve Bank of India (RBI) has encouraged banks and financial institutions to cease entering into new financial contracts that reference LIBOR as a benchmark as soon as practicable and and in any case by December 31, 2021.

The central bank also advised banks and financial institutions to encourage their customers to cease entering into new London Interbank Offered Rate (LIBOR) referenced contracts.

Instead of LIBOR, the central bank asked them to use any widely accepted alternative reference rates (ARR).

This directive has been issued to ensure orderly, safe and sound LIBOR transition and considering customer protection, reputational and litigation risks involved, the RBI said in a circular.

LIBOR has been used in the global financial system as one of the benchmarks for a large volume and broad range of financial products and contracts.

According to a 2014 Financial Stability Board report, the cases of attempted market manipulation and false reporting of global reference rates, together with the post (global financial)-crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates.

The “Roadmap for LIBOR Transition” comes in the aforementioned context.

Comprehensive review

The RBI wants banks/financial institutions to undertake a comprehensive review of all direct and indirect LIBOR exposures and put in place a framework to mitigate risks arising from such exposures on account of transitional issues including valuation and contractual clauses.

They may also put in place the necessary infrastructure to be able to offer products referencing the ARR.

The central bank underscored that continued efforts to sensitise clients about the transition as well as the methodology and convention changes involved in the alternatives to LIBOR will be critical in this context.

While certain US dollar LIBOR settings will continue to be published till June 30, 2023, the RBI observed that the extension of the timeline for cessation is primarily aimed at ensuring roll-off of US dollar LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR.

“It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), contracted on or before December 31, 2021,” it added.

MIFOR

RBI said banks are also encouraged to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), published by the Financial Benchmarks India (FBIL), which references the LIBOR as soon as practicable and in any event by December 31, 2021.

FBIL has started publishing daily adjusted MIFOR rates from June 15, 2021 and modified MIFOR rates from June 30, 2021 which can be used for legacy contracts and fresh contracts respectively.

Banks may trade in MIFOR after December 31, 2021 only for certain specific purposes such as transactions executed to support risk management activities such as hedging, required participation in central counterparty procedures (including transactions for hedging the consequent MIFOR exposure), market-making in support of client activities or novation of MIFOR transactions in respect of transactions executed on or before December 31, 2021.

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Libor drops to record low

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The three-month London interbank offered rate for dollars slid the most in seven weeks on Wednesday as an excess of cash in front-end fixed-income markets kept borrowing costs anchored near zero.

Libor fell for a fourth day to a new record low, dropping almost 1.1 basis points to 0.17288 per cent, the largest one-day decline since March 4. The spread of Libor over overnight index swaps shrank to the least since 2010.

Rates for repurchase agreements, Treasury bills and other short-term dollar borrowing instruments have been driven to zero and below, weighed down by Federal Reserve asset purchases, a shift from bank deposits to money-market funds, and an increase in bank reserves that’s being fuelled by a drawdown of the US Treasury’s mammoth cash pile. That in turn is helping weigh on Libor.

While there’s more cash in the system, demand to borrow from commercial-paper markets has also collapsed, which has facilitated the decline. March saw a puzzling surge in three-month AA financial commercial paper issuance, with one day seeing the largest sales since 2014. Libor held steady through March, but has steadily declined in April as supply has collapsed.

“This lack of commercial paper has certainly contributed to the decline in Libor/OIS,” Morgan Stanley strategists including Kelcie Gerson wrote in a client note. The spread fell to around 8.5 basis points on Wednesday.

Despite the Libor/OIS spread being at the tightest level since 2010, the move could still have further to go, according to NatWest Markets.

The spread between three-month Libor and T-bills is at 15.7 basis points, which is “relatively high” in the range of the past year, and can tighten to the November lows of around 12 basis points, NatWest’s head of U.S. rates strategy Blake Gwinn wrote in a client note.

The drop in Libor prompted a flurry of activity across June 2021 euro-dollar futures, with immediate buying of 20,000 contracts after the fix. The contract closed at 99.815, implying a three-month fix at 0.185 per cent — around one basis point higher than the current level.

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Asian companies ready debt deals under new benchmark rate rules

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Asia’s financial companies are gearing up to issue their first debt using a new global benchmark interest rate that will replace the contentious Liboras the region catches up to the rest of the world, according to bankers and advisors.

Britain’s financial regulators last week called a formal halt to nearly all Libor rates from the end of this year, piling pressure on markets to quicken a switch in interest rates used in $260 trillion of contracts globally.

Also read: The end of Libor: the biggest banking challenge you’ve never heard of

Libor (London Interbank Offered Rate) is being replaced with rates compiled by central banks after lenders were fined billions of dollars for trying to rig the reference rate for their own gain in 2012.

Also read: NBFCs in India need to plan for effective IBOR transition: EY India

SOFR replaces Dollar Libor

The Dollar Libor will be replaced by the Secured Overnight Financing Rate (SOFR), which is published by the New York Federal Reserve to use as a reference point for US dollar derivative and debt transactions.

The deadline is likely to expedite the number of debt transactions in Asia using SOFR to meet the regulator’s timetable and set the borrowers’ costs of funds, after the Covid-19 pandemic resulted in a slow take-up rate in the region.

“The first wave of deals using the new benchmarks will be initiated by banks, financial institutions and asset managers due to the push by regulators on them to lead the way,” said Jean Woo, partner at law firm Ashurst.

Asia’s first issuance

Korea Development Bank (KDB), a state-owned policy bank,last week raised $300 million in a three-year floating rate note– the first issuance in Asia sold globally using SOFR as the reference rate.

Also read: ICICI bank makes its first interbank-money market transaction linked with SOFR

Some $2.25 billion worth of SOFR bonds have been issued in Asia in the past 12 months compared to the global total of $160.8 billion, according to Refinitiv data. US companies have issued $124.9 billion worth of SOFR linked deals in that time.

“The whole world is moving towards it, people cannot be closed to the fact there is a change and issuers need to be making steps towards moving to the transitions,” said Amy Tan,head of DCM Origination Asia ex-Japan at JPMorgan.

Joseph Pepping, head of debt capital markets syndicate for the Asia-Pacific region at Bank of America, said the switch away from LIBOR had not been a high priority for Asian borrowers in 2020 but he expected that to change.

“We expect … for more Asian issuers to elevate this on their priority list,” he said.

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NBFCs in India need to plan for effective IBOR transition: EY India

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Non-Banking Finance Companies (NBFCs) in India need to plan for an effective Inter Bank Offered Rate (IBOR) transition, as majority of LIBOR rates are likely to be phased out by the end of 2021, a new EY India report has suggested.

London Inter Bank Offered Rate (LIBOR) is one of the most common series of benchmark rates referenced by contracts measured in trillions of dollars across global currencies.

About $350 trillion worth of contracts across the globe are pegged to LIBOR, which is the key interest rate benchmark for several major currencies.

Some of the leading banks in India have also embarked on the journey to assess the impact of LIBOR cessation on their balance sheets and operations, according to EY India report, ‘Impact of IBOR transition on NBFCs in India’.

Key challenges

The report underpins the key challenges that will need to be addressed by NBFCs, banks and other institutions with respect to contract amendments, financial reporting, tax and other risks due to cessation of LIBOR rates after 2021.

NBFCs cannot remain detached from this transition as it is equally important for them to inventorise their LIBOR-linked borrowings and derivative exposures and develop a proactive roadmap to assess the impact on their financial statements, bottom line and their ability to raise overseas borrowings at a competitive rate.

Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS), EY India, said in a statement: “This is an opportune time for NBFCs to develop LIBOR transition plans and proactively communicate with regulators, investors, lenders, customers and other counterparties. This will invariably enable NBFCs to proactively engage with their corporate clients who will also be impacted by LIBOR migration on account of their sizeable overseas borrowings and derivative exposures.”

NBFCs with exposures to interest rate derivatives and foreign currency borrowings linked to LIBOR need to be mindful of transition to Alternative Reference Rates (ARR), also known as Risk free rates (RFR). There is an estimated overseas foreign currency borrowings of $13 billion and notional derivative exposure covering forward rate agreements, interest rate swaps and cross currency swaps to the tune of $18 billion across the top 10 NBFCs.

It is imperative for NBFCs to understand what it means to link their forex borrowings and derivative transactions to Secured Overnight financing rate (SOFR), Sterling Overnight Interbank Average Rate (SONIA), or other comparable RFR benchmark interest rates.

MIFOR

Incidentally, the Mumbai Interbank Forward Offer Rate (MIFOR), widely used by banks in India for setting prices on forward rate agreement and derivatives, has USD LIBOR as its core component. This may now be linked with SOFR, the ARR used for US dollar denominated derivatives and loans.

NBFCs may need to examine their legacy contracts linked to LIBOR and understand hedging and other implications on new contracts that may be linked with SOFR or any other comparable benchmark rates.

An early impact assessment will help NBFCs understand the problem statement and respond ahead of time, if it means repapering the contracts or aligning its wider treasury and hedging objectives on foreign currency loans hedged with derivatives, according to the EY India report.

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