Tag: Secured Overnight Financing Rate

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

Banking & Finance

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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 asks banks to shift from scam-tainted LIBOR to other rate benchmarks, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has asked banks and financial institutions to use any widely accepted alternative reference rate (AAR) instead of LIBOR (London Interbank Offered Rates) as the reference rate for entering into new financial contracts.

The Reserve Bank‘s directive follows a decision of the Financial Conduct Authority (FCA), UK which on March 5, 2021, had announced that all LIBOR settings would either cease to be provided by any administrator or would no longer be representative.

The UK directive to phase out LIBOR came after a rate fixing scandal involving major global banks.

The RBI directive

In order to deal with the emerging situation, the RBI has asked banks and financial institutions to “cease entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021.” The financial institutions, it suggested, should incorporate robust fallback clauses in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings.

The RBI has also advised the financial institutions to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, latest by December 31, 2021.

Board approved plan

The Reserve Bank of India (RBI) had in August 2020 asked banks to frame a board approved plan, outlining an assessment of exposures linked to LIBOR and steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the ARR.

While certain US dollar LIBOR settings will continue to be published till June 30, 2023, the extension of the timeline for cessation is primarily aimed at ensuring roll-off of USD 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,” the RBI said.

It has also asked banks and financial institutions to incorporate robust fallback clauses, preferably well before the respective cessation dates, in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the respective LIBOR settings.

The central bank also said it will continue to monitor the evolving global and domestic situation with regard to the transition away from LIBOR and proactively take steps to mitigate associated risks in order to ensure a smooth transition.

LIBOR scandal

The LIBOR Scandal was a highly-publicised scheme in which bankers at several major financial institutions colluded with each other to manipulate the LIBOR. The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions. Although the scandal came to light in 2012, there is evidence suggesting that the collusion in question had been ongoing since as early as 2003.

Many leading financial institutions were implicated in the scandal, including Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and the Royal Bank of Scotland (RBS). As a result of the rate fixing scandal, questions around LIBOR’s validity as a credible benchmark rate have arisen and it is now being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR).



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