IBOR Benchmark Transition
What is IBOR?
Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), serve as widely accepted benchmark interest rates that represent the cost of short-term, unsecured, wholesale borrowing by large globally active banks. A group of banks submits rates on a daily basis, which are averaged and published for a variety of currencies and tenors.
Historically, IBORs have grown in relevance, with some estimates suggesting they serve as interest rate benchmarks for over $350 trillion in financial products, including bonds, derivatives mortgages and other loans. IBORs are used by financial institutions, corporations and governments, as well as retail market participants. IBORs are used not only as benchmarks in financial contracts, but also often as the basis for valuations.
What is the IBOR Transition?
In 2013, the G20 asked the Financial Stability Board (FSB) to undertake a fundamental review of major interest rate benchmarks. This work led to the recognition that even after reforms that strengthened the underlying processes, certain risks relating to robustness and reliability of IBORs could not be fully addressed. Notably, structural shifts in the way major banks funded their operations had led to declining transaction volume in the markets that underpin IBORs.
In 2017, the Financial Conduct Authority (FCA; the UK body that regulates LIBOR) declared that after 31 December 2021 it will no longer compel banks to continue making LIBOR submissions. The FCA's statement triggered what is now known as the IBOR Transition, a multi-year process of phasing out (L)IBOR rates and reliance on those in legacy and new transactions. The ICE Benchmark Administration (IBA) has announced that it will cease publication of the GBP, EUR, CHF, and JPY fixings, as well as the 1 week and 2 month USD LIBOR fixings at the end of 2021, and will cease publication of the other USD LIBOR fixings (overnight, 1 month, 3 months, 6 months, and 12 months) at the end of June 2023.
Unlike EUR LIBOR, EURIBOR is not expected to cease publication in the near term.
What will IBOR be replaced with?
The first step towards the IBOR Transition was the designation of Alternative Reference Rates (ARRs) which have been slated to replace certain IBORs. Industry groups comprising public and private sector representatives across jurisdictions have identified these replacement benchmarks, and consultations are on-going to establish new conventions and transition approaches.
What is known about the ARRs across jurisdictions?
While ARRs have been identified for various currencies (including GBP, USD, EUR, CHF and JPY), development and market acceptance differs across jurisdictions. For example, SARON (the CHF ARR) and SONIA (the GBP ARR) have been published for over ten years, while €STR (the EUR ARR) only began publication in October, 2019. The below table provides a summary of the current landscape in certain jurisdictions.
Jurisdiction USA EU Switzerland UK Japan Legacy benchmark USD LIBOR EURIBOR, EONIA, Euro LIBOR CHF LIBOR GBP LIBOR JPY LIBOR, JPY TIBOR, EUROYEN TIBOR Recommended Alternative Reference Rate SOFR
Secured Overnight Financing Rate
Euro Short Term Rate
Swiss Average Rate Overnight
Sterling Overnight Index Average
Tokyo Overnight Average Rate
Administrator Federal Reserve Bank of New York
European Central Bank
SIX Swiss Exchange
Bank of England
Bank of Japan Underlying Market US Treasury Repo market; Transaction-based
Overnight unsecured fixed rate deposit transactions over €1mn; Transaction-based
CHF Repo Market; Based on transactions and binding quotes
Overnight unsecured sterling deposit transactions; Transaction-based
Overnight unsecured call rate market; Transaction-based Industry Working Group Alternative Reference Rates Committee (ARRC)
Working Group on Euro Risk-Free Rates (Euro RFR WG)
National Working Group on Swiss Franc Reference Rates (Swiss NWG)
Working Group on Sterling Risk-Free Reference Rates (UK RFR WG)
Study Group on Risk-Free Reference Rates Initial ARR Publication Date 3 April 2018
2 October 2019
2009 1997; Reformed 23 April 2018
1992 Secured vs. Unsecured Secured Unsecured Secured Unsecured Unsecured Publication Time Published at 8am Eastern Time on following business day
Published at 9am CET on following business day
Published daily every 10 minutes from 8:30AM, with fixings at 12pm, 4pm, 6pm
Published at 9am CET on following business day
Published at 10am on following business day
What are the core differences between IBORs and ARRs?
ARRs differ from IBORs in several respects. IBORs represent interest rates for unsecured interbank loans across various tenors. As such, they are forward-looking term rates which incorporate unsecured bank credit risk. In contrast, ARRs are overnight interest rates which incorporate little or no credit risk. Furthermore, the markets underpinning the ARRs are significantly more active than the markets underpinning the IBORs. Hence, while IBORs rely significantly on expert judgement, ARRs are transaction-based.
Benchmark IBORs ARRs Tenors Published for various tenors; LIBOR tenors include: overnight, 1 week, 1 month, 2 months, 3 months, 6 months and 12 months
Overnight Secured vs. Unsecured Unsecured
Secured: SOFR and SARON;
Unsecured: €STR, SONIA and TONA
Credit risk Incorporate a term bank credit spread
Minimal credit risk Rate determination method Rely in large part on expert judgement, due to low volume in underlying markets
Transaction based with significant volume in underlying markets
How will interest be calculated in ARR-linked transactions?
How will IBOR-linked transactions be affected by the IBOR Transition?
What are the key regulatory and industry milestones globally, and for each jurisdiction?
The timeline of the LIBOR cessations is coming into focus. In December 2020, LIBOR’s administrator, IBA, launched a consultation on its intent to cease publication of LIBOR settings according to the following timing:
- December 31, 2021: cease publication of all GBP, EUR, CHF, and JPY LIBOR settings, as well as the one week and two month USD LIBOR settings, immediately following the LIBOR publication on December 31, 2021.
- June 30, 2023: cease publication of overnight, and 1, 3, 6 and 12 month USD LIBOR settings, immediately following the LIBOR publication on June 30, 2023.
Subject to the outcome of these consultations, we may soon know definitively that the LIBOR indices will cease according to the timelines indicated above.
Most bilateral IBOR-linked derivatives contracts globally are governed by ISDA documentation, and ISDA has taken significant steps to facilitate the orderly transition of these contracts. In particular, they have developed updated Fallback Provisions for these derivatives.
- Background: The original Fallback Provisions for certain IBORs in the 2006 ISDA Definitions require that, in the event that the IBOR is not published, the Calculation Agent determines the substitute rate via a dealer poll; there is no further fallback if the dealer poll fails. It is unclear what the outcome of such provisions would be in the event of a permanent cessation of IBOR, hence ISDA has developed new, robust Fallback Provisions.
- Supplement & Protocol: In October 2020, ISDA launched the IBOR Fallbacks Supplement (“the Supplement”) and the ISDA 2020 IBOR Fallbacks Protocol (“the Protocol”). The Supplement amends the 2006 ISDA Definitions to incorporate the newly developed Fallback Provisions (described below), with the changes having come into effect on January 25, 2021. As a result of that amendment, all derivatives transactions executed after January 25, 2021, which incorporate the 2006 ISDA Definitions, will automatically contain these new Fallback Provisions (regardless of whether the parties to those transactions have adhered to the Protocol). The Protocol enables market participants to incorporate these same new Fallback Provisions into legacy derivatives transactions. In particular, in cases where two parties have adhered to the Protocol via ISDA’s website, all in-scope bilateral legacy IBOR-linked transactions outstanding between those parties, as of January 25, 2021, are amended to incorporate the new Fallback Provisions.
- Fallback Terms: Broadly, the Fallback Provisions in the Supplement and Protocol dictate that if an in-scope IBOR ceases (or, in the case of LIBOR, becomes non-representative), the benchmark shall fall back to the corresponding ARR, compounded in arrears over a prescribed calculation period, plus a spread which has been calibrated historically.
- Credit Suisse adherence: Most of Credit Suisse’s major legal entities have adhered to the Protocol. Please reach out to your Credit Suisse representative if you have questions about the protocol, or about whether a specific Credit Suisse entity has adhered.
The above does not constitute a comprehensive summary of the Supplement and Protocol. Please review the legal documents in detail, and, if necessary, consult with a legal advisor, if you need to understand the terms in detail.
Regulatory and Industry Group Milestones:
- Despite the likely continued publication of certain USD LIBOR settings until June 30, 2023, US regulators have stated that banks should cease entering into new contracts that use USD LIBOR "as soon as practicable and in any event by December 31, 2021" (except, possibly, in very limited circumstances). The expected continued publication of the major USD LIBOR settings between the end of 2021 and the end of Q2 2023 is meant to facilitate the orderly wind-down of legacy transactions, not to prolong the period of time for which new USD LIBOR business is entered into.
- The ARRC has published the “ARRC Recommended Best Practices for Completing the Transition from LIBOR”, which is available here. This guide sets out recommended dates, by product type, for:
a. Incorporation of “hardwired” Fallback Provisions
b. Technical and operational readiness by third party vendors
c. Cessation of new use of USD LIBOR
d. Identification of anticipated fallback rates, by the determining party
Those dates are summarized in the below table:
Product Hardwired Fallbacks Incorporated By Tech/Ops Vendor Readiness By Target For Cessation Of New Use Of USD LIBOR By Anticipated Fallback Rates To Be Identified Floating Rate Notes 6/30/2020 6/30/2020 12/31/2020 6 months prior to reset after LIBOR's end Business Loans & Mortgages
Syndicated Loans: 9/30/2020
Bilateral Loans: 10/31/2020
9/30/2020 6/30/2021 6 months prior to reset after LIBOR's end Consumer Loans - Student Loans
Student Loans: 9/30/2020
In accordance with relevant consumer regulations Securitizations 6/30/2020 12/31/2020
6 months prior to reset after LIBOR's end Derivatives Not later than 3-4 months after the Amendments to
ISDA 2006 Definitions are published
Dealers to take steps to provide liquid SOFR
derivatives markets to clients
Term Rates: The ARRC is pursuing the development of a forward-looking term rate based on SOFR. It is not yet clear whether such a rate will be published, nor how widely it will be used, if it is published.
Regulatory and Industry Group Milestones:
- The FCA and the Bank of England have endorsed three industry targets for the GBP lending market:
– By the end of Q3 2020, lenders should be able to offer non-LIBOR-linked products to customers.
– The issuance of loans linked to GBP LIBOR (and maturing after the end of 2021) should cease by end-Q1 2021.
– After end-Q3 2020, all new or re-financed loans linked to LIBOR should include clear contractual arrangements to facilitate the transition off of LIBOR prior to the end of 2021.
- The UK RFR WG has set out more detailed milestones, which are available here.
Term Rates: Forward-looking term rates based on SONIA have begun to be published by certain benchmark administrators. It is not yet clear how widely used these will be.
Regulatory and Industry Group Milestones:
FINMA has issued a guidance to supervised institutions on the LIBOR transition with circular 10/2020, which sets out the below pre-cessation milestones relating to the LIBOR tenors to be discontinued by end 2021 (see Cessation Timeline above):
- By January 25 2021: Signing of the ISDA 2020 IBOR Fallbacks Protocol (building on FINMA circular 08/2020)
- By January 31 2021:
– No new “tough legacy”, primarily in CHF and EUR LIBOR, and where possible in GBP, JPY and USD LIBOR
– Readiness to grant loans based on ARR (or, alternatively, fixed interest rates)
- By March 31 2021: Plans for reduction of “tough legacy” and recommendation for at least initial contact with the respective client/counterparty having been made
- By June 30 2021:
– System and process changes implemented to enable transition to ARRs and the application of fallback rates
– Mitigation of risks for remaining “tough legacy”
– New contracts in general based on ARR
- By December 31 2021:
– Full operational readiness, i.e. all relevant systems and process to function without reliance on LIBOR
– All new contracts based on ARR
Term Rates: There is currently no expectation that forward-looking term rates based on SARON will develop, and the Swiss NWG is not pursuing them.
Regulatory and Industry Group Milestones:
- Unlike the LIBORs, there is no plan to discontinue the publication of EURIBOR in the near future
- In Q1 2021, the European Money Markets Institute (“EMMI”) announced that four “non-material adjustments” would be made to the way that EURIBOR is calculated. Further information is available here.
- EMMI has stated that the Euro Overnight Index Average (“EONIA”) will cease publication at the end of 2021.
Term Rates: The Euro RFR WG is working on developing forward-looking term rates based on €STR, however it is not yet known if or when they will be made available.
The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks published the “Second Public Consultation on the Appropriate Choice and Usage of Japanese Yen Interest Rate Benchmarks” to deal with when fallbacks are triggered in cash products referencing Japanese Yen and Loans on the spread adjustment methodology applicable to TIBOR as the replacement benchmark.
The Committee has also published a roadmap to prepare for the discontinuation of LBOR and indicate the below measures and timeline to be taken by firms:
- Loans: Develop systems and operations for O/N RFR Compounding (Fixing in Arrears) by Q1 2021
- Loans: Cease the issuance of new loans referencing LIBOR by Q2 2021
- Loans: Significantly reduce the amount of loans referencing LIBOR by Q3 2021
- Bonds: Develop systems and operations for O/N RFR Compounding (Fixing in Arrears) by Q1 2021
- Bonds: Cease the issuance of new bonds referencing LIBOR by Q2 2021
- Bonds: Significantly reduce the amount of bonds referencing LIBOR by Q3 2021
Details can be found in links below:
Term Rates: In Japan, a term rate based on TONA, called Tokyo Term Risk Free Rate (“TORF”) is currently under development, and the aim is for it to be published on a production basis in mid-2021. It is not yet clear how widely used this rate will be.
HKMA has, in consultation with the Treasury Markets Association (TMA), developed the following transition milestones which Authorized Institutions (“AIs”) are expected to achieve:
i (AIs should be in a position to offer products referencing the ARRs to LIBOR from 1 January 2021;
ii Adequate fall-back provisions should be included in all newly issued LIBOR-linked contracts that will mature after 2021 from 1 January 2021; and
iii AIs should cease to issue new LIBOR-linked products that will mature after 2021 by 30 June 2021.
Association Banks of Singapore (“ABS”) and Steering Committee of SOR transition to SORA (“SC-STS”) published the following timelines for the transitions from SOR to SORA.
- By end-April 2021, all lenders and borrowers to cease issuance of SOR-linked loans and securities that mature after end-2021;
- To support this, all Domestic Systemically Important Banks (D-SIBs) should be ready to offer a full-suite of SORA-based products to their customers by end-February 2021, while all non-DSIB banks should be ready to offer new SORA-based products by end-April 2021.
- By end-September 2021, all banks to have substantially reduced gross exposures to SOR derivatives, including centrally cleared interbank transactions. Relative to the stock of outstanding contracts as reported by the bank to MAS’ May 2020 survey, to reduce this to:
– 90% by end-2020
– 70% by Q1 2021
– 50% by Q2 2021
– 20% by Q3 2021
Who is driving the industry transition?
A major structural change in global financial markets is now well under-way, with global regulators stating that the market must have removed dependencies on IBORs prior to the end of 2021. Further, given the historical scope and breadth of the IBORs across nearly all markets and products, regulators and industry groups are encouraging a gradual transition (including conversions of legacy contracts) rather than a one-time, "cliff-edge" event.
Accomplishing this task requires the input and coordination of many different market and industry participants including: industry groups, trade organizations, financial institutions and regulators.
Industry Groups: Various national industry groups (including the Swiss NWG, the ARRC, and the Euro RFR WG) have been established to define and guide the transition. These groups and their participants – including Credit Suisse, in many cases – have completed a number of steps, including:
- Publishing recommended product guidelines and building blocks, including recommended fallback language.
- Establishing timelines and milestones for the transition (e.g. the date by which central clearing houses should adopt SOFR-based discounting for USD-denominated swaps).
- Creating a forum for industry participants to provide feedback and discuss best practices.
Trade Organizations: The International Swaps and Derivatives Association (ISDA), the Loan Market Association (LMA) and the Loan Syndications and Trading Association (LSTA) have been defining contractual standards both to (a) provide for the inclusion of Fallback Provisions, in order to facilitate an orderly transition off of IBORs in legacy contracts, and (b) allow financial contracts to reference the ARRs from day 1, according to prescribed terms.
Financial Institutions: Credit Suisse and many other banks, brokerage firms and vendors in the financial services industry have mobilized transition programs to implement the switch to ARR-linked products before the end of 2021. Further, certain clearinghouses have already transitioned their discounting and margining interest rates from the legacy EONIA and EFFR rates onto ESTR and SOFR, respectively (for certain EUR and USD-denominated contracts) during the course of 2020, and are now defining the terms by which IBOR-linked contracts will be transitioned to ARR at or prior to IBOR cessation.
What is the timeline for the IBOR Transition?
While certain questions remain unanswered at this time, it is clear that the global landscape for benchmark users (from private clients to large institutional investors and corporations) has already been decidedly transformed, with the global transition expected to be completed by the end of 2021. The below time-line provides a high-level overview of certain milestones that have been or are expected to be completed as the IBOR Transition moves forward:
What is Credit Suisse's Transition approach?
Credit Suisse has established a Global IBOR Transition Program, which is responsible for working with the businesses and support groups across various divisions and regions to coordinate and deliver the execution of a smooth and orderly transition. The Program's mandate covers all aspects of the transition including: operational readiness, legal contract remediation, exposure quantification, risk mitigation and industry group engagement.
To ensure the approach taken by Credit Suisse is aligned with industry practice, the Program and its partners participate in a number of public and private sector industry groups which were set up in order to specifically guide the IBOR Transition. These groups include the UK RFR WG, the ARRC, and Swiss NWG. In addition, the Program also works closely with long-standing trade organizations such as ISDA which are playing an important role in facilitating the transition for specific types of products.
Following industry agreed best practices Credit Suisse:
- Is operationally ready for and commenced offering ARR-linked alternatives in most products where the market consensus is developed enough to offer transparent pricing;
- Has commenced an outreach program covering clients worldwide, keeping them abreast of recent developments and to discuss options and client intentions for the transition;
- Adhered to the ISDA IBOR Protocol (during the “escrow” period)
- Mobilized resources that cover all aspects of the transition process and facilitate client journeys;
- Remained active in industry forums and working groups collaborating with regulators, industry organizations and market participants setting the stage for the completion of the transition.
I'm a Credit Suisse client. How will the IBOR Transition impact me?
The IBOR Transition will impact certain Credit Suisse products and services that Credit Suisse clients currently hold or use and those that will be offered in the future. While the extent of the impact will depend on a range of factors which include evolving market and industry developments, potential impacts include changes to valuations, documentation and product performance.
Please further note that the impact of an IBOR cessation on an existing IBOR-linked transaction depends on the terms and conditions of the transaction, and in particular may depend on Fallback Provisions which (if applicable) determines which interest rate benchmark shall be used in the event of such IBOR cessation.
Credit Suisse may reach out to clients once there is more clarity on which new benchmarks are being adopted, their conventions, their term structure (if any) and the transition process agreed and adopted at an industry level. In the meantime, clients may wish to take certain steps to prepare for the transition. Certain steps to consider include:
- Conducting a documentation review of existing contracts to identify references to IBORs or other affected interest rate benchmarks.
- Considering what steps need to be taken to ensure operational readiness.
- Considering whether and when to transact in products referencing new ARRs.
- Being aware of industry developments.
How can I find out more?
Credit Suisse will seek to update this page periodically as market developments occur and industry announcements are made. In addition, should you seek general information on the IBOR Transition, please consider reviewing published information from regulators, working groups and other industry bodies. A non-exhaustive list of websites is included here:
For further information on specific Credit Suisse products and services, including those to which you may have exposure, please contact your sales representative or relationship manager.
Additional Resources For Swiss Clients
The content of this page reflects Credit Suisse's current understanding of the IBOR Transition. Please note that the overview provided here is not meant to be complete nor exhaustive and does not constitute advice or recommendation. Credit Suisse will seek to update this page periodically as market developments occur and industry announcements are made.