IBOR Transition

AFME is closely engaged with regulators and policymakers in the UK and the Eurozone on the issue of transitioning from IBORs (Interbank Offered Rates) to new risk-free reference rates.

Overview

Given the prominent role IBORs currently play in capital markets, acting as the reference rates for trillions of Euros of financial contracts such as bonds, securitisations and derivatives, we believe it is vital that concerted and coordinated action is taken to ensure a smooth transition to new risk-free rates (RFRs).

Andrew Bailey, Chief Executive of the FCA, has stated on numerous occasions, the first time in July 2017, that the FCA will no longer persuade, or compel, panel banks to submit to Libor after the end of 2021, at which point the future of LIBOR becomes uncertain.

In June 2018 AFME jointly published the IBOR Global Benchmark transition report with ISDA, ICMA and SIFMA. The report presents the results of a survey with 150 banks, end users, infrastructures and law firms in 24 countries, and assesses the issues involved with benchmark reform. Its findings highlight the scale of the work which still needs to be done by industry to ensure full readiness for the transition. It also makes specific recommendations for steps firms can take to be fully prepared. The Report remains a useful introductory document.

AFME also co-ordinates carefully with other trade associations including SIFMA, GFMA, ICMA and ISDA. ISDA in particular is playing a key role due to the much larger size of the derivatives markets. Most of our fellow trade associations have similar pages to this on their websites.

AFME also contributes to the work of Bank of England’s Working Group on Sterling Risk-Free Reference Rates and the private sector working group on euro risk-free rates.

In December 2019, in collaboration with international law firm Simmons & Simmons, published the first in a series of papers, entitled "LIBOR Transition: Managing the Conduct and Compliance Risks'

In June 2020, AFME and Simmons & Simmons published it's second paper focusing on considerations for client communications.

AFME model wording for securitisations

As the leading European trade association for securitisations, AFME has published model wording for new issues of securitisation bonds to help facilitate the transition from IBORs to new risk-free rates. The model wording provides an easier mechanism for the transition to an alternative rate when LIBOR/EURIBOR is no longer available. It does not identify a new rate but makes the procedure for moving to such a rate (once identified) easier, by avoiding the need to undertake a consent solicitation. The model wording has been well received by the authorities and we have been pleased with its wide adoption across the market which, together with the very rapid adoption of SONIA for sterling securitisations in recent months, represents good progress. Much work remains, of course, to deal with the difficult challenges of transitioning legacy deals.

Eurozone

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The working group on euro risk-free rates has confirmed that €STR (formerly known as ESTER) will become the new euro risk-free rate to replace the euro overnight index average (EONIA). The publication of €STR began in October 2019.

For term rates, EURIBOR will continue for the medium-term, albeit with a reformed hybrid methodology based on both submissions and transactions. These reforms are expected to be completed during the second half of 2019. Work will also continue on the establishment of credible alternative fallback rates to EURIBOR, based on €STR.

The transition period for EURIBOR to become compliant under the BMR will continue until 31 December 2021, having been extended by two years from the previously planned deadline of 1 January 2020.

More information can be found here.

Sterling Markets

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Together with the FCA, the Bank of England is working with participants to catalyse a transition to using SONIA as the primary interest rate benchmark in sterling markets.

In April 2017, the Working Group on Sterling Risk-Free Reference Rates recommended the SONIA benchmark (Sterling Overnight Index Average) as its preferred risk-free rate and since then has been focused on how to transition to using SONIA across sterling markets.

Since then there has been a decisive shift away from LIBOR and towards SONIA-referencing transactions in cash markets such that today SONIA is already established as the preferred reference rate in unsecured FRNs and covered bonds, and has also rapidly been adopted in securitisation markets. The basis adopted for all SONIA issues to date has been the same: backwards-looking SONIA compounded in arrears with a five day lag. The use case for a term rate for these cash markets has therefore diminished.

More information can be found here.

United States

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The Alternative Reference Rates Committee (ARRC) is a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from U.S. dollar LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR).

AFME’s sister association in the US, SIFMA, actively participates in the ARRC’s work.

More information can be found here.

GFMA

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AFME’s sister association with a global focus, GFMA, has published IBOR Transition Documents which include key timelines and milestone for various currencies, a snapshot of IBOR and RFR variables associated with each currency and information on official sector working group activities and near-term expected actions. GFMA also publishes a monthly newsletter on global Ibor developments.

Key Documents

Useful Links

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Bank of England - Transition to sterling risk-free rates from Libor resources

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ECB - Interest rate benchmarks resources

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ESMA - Benchmarks resources

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Federal Reserve - Alternative Reference Rates Committee

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FSB - Financial Benchmarks resources