IBOR Reforms

Interest rate benchmarks including the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) are being reformed.

Interbank Offered Rates

Overview 

These reforms are expected to cause at least some of these benchmarks to perform differently to the way they do currently or to disappear, which may impact the HSBC products and services you use and those we provide in the future.

Regulatory authorities and public and private sector working groups in several jurisdictions have been discussing the alternatives to IBORs, but there is still uncertainty over when these alternative rates will be available and how the reforms will impact specific financial products and services.

The content of this page reflects HSBC’s current understanding and does not constitute any form of advice or recommendation. Clients should seek guidance from their professional advisors on the possible implications of the changes including from a financial, legal, accountancy or tax perspective.

This summary provides an overview of the expected changes as at June 2019, albeit there is significant uncertainty.

Background

In a wide range of financial products such as derivatives, overdrafts and loans (including mortgages), securitisations and deposits, interest rates can be fixed or alternatively calculated by reference to benchmark rates.

LIBOR, probably the most widely used benchmark, is published in a number of currencies and used in financial products denominated in GBP (British Pound), USD (US Dollar), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc). Certain currencies are also covered by their local benchmark such as EURIBOR and EONIA for EUR or the Tokyo Interbank Offered Rate (TIBOR) for JPY. Other IBORs also exist in other currencies, such as HIBOR (for Hong Kong Dollar) and SIBOR (for Singapore Dollar).

Financial regulatory authorities have expressed their concern that the interbank lending market, which IBORs are intended to reflect, is no longer sufficiently active or liquid. This concern has resulted in an effort to encourage financial markets to transition away from the use of IBORs to risk free rates (RFRs) or change the way that IBORs are currently determined.

Frequently Asked Questions

The Frequently Asked Questions below attempt to clarify some of the key themes.

What is LIBOR?
Do the proposed changes only impact LIBOR?
What are the replacement benchmarks?
What do we know about these alternative benchmarks?
When will the changes take effect?
What do these reforms mean for HSBC clients?
What is HSBC doing to understand the potential impact on clients?
What is HSBC doing to mitigate the impact of any change for clients?
Do HSBC clients need to do anything now?

What is LIBOR?

Interest rates can be fixed or alternatively calculated by reference to benchmark rates. The London Interbank Offered Rate (LIBOR) is one of the most commonly used benchmarks for interest rates and is referenced in financial products such as derivatives, bonds, loans, structured products, mortgages. It often forms the basis on which interest payments under those products are calculated.

LIBOR is published on each London business day and is administered by ICE Benchmark Administration (IBA). It is based on quotations received from LIBOR panel banks, which are a group of banks who provide information to IBA as to the amount it would cost them to borrow from other banks so that an average can be calculated and published.

LIBOR is published in five currencies (Euro, Japanese Yen, Pound Sterling, Swiss Franc and US Dollar) and for seven interest periods (ranging from overnight to 12 months).

Certain jurisdictions also use a specific benchmark for their currency such as EURIBOR for EUR or TIBOR for JPY. Other IBORs also exist in other currencies (for example, HIBOR in Hong Kong and SIBOR in Singapore).

Do the proposed changes only impact LIBOR?

The issues which affect the perceived robustness of LIBOR (such as the lack of interbank lending transactions on which to base the rate) also affect other interbank offered rates (IBORs) such as the Euro Interbank Offered Rate (EURIBOR). The way in which EURIBOR is calculated is therefore undergoing reform.

In the United States, the preferred risk-free rate (which is called the Secured Overnight Financing Rate or SOFR) is a new rate. Currently, the most frequently used overnight interest rate benchmark in the United States is the Effective Federal Funds Rate (EFFR). In connection with the transition away from US Dollar LIBOR, a working group in the United States which consists of both private and public sector entities - known as the Alternative Reference Rates Committee (ARRC) - is currently planning a transition to SOFR which will result in SOFR being used instead of EFFR in a number of cases.

In addition to the IBORs, other interest rate benchmarks are being looked at. For example, the way in which the Euro Overnight Index Average (EONIA) is determined is expected to change so that it is calculated as the Euro Short Term Rate (€STR), which is a new rate to be published from October 2019, plus a spread adjustment. It is also currently anticipated that EONIA will be discontinued at the end of 2021 to be replaced by €STR.

Other rates are also being looked at in Hong Kong, Singapore, Switzerland, Japan, Australia and Canada amongst other places. As at 1 May 2019, the level of information varies between jurisdictions with regards to the replacement benchmark, timescale or transition methodology.

What are the replacement benchmarks?

RFR working groups combining public and private sector representatives in several jurisdictions, including the US, UK, EU, Switzerland and Japan (amongst others), have identified replacement benchmarks, and have begun developing strategies for transition, as shown in the table below:

Currency Reference Rate Anticipated replacement Regulator
USD USD LIBOR1 SOFR (Secured Overnight Financing Rate) Federal Reserve Bank of New York
EUR EURIBOR and EUR LIBOR EURIBOR is being reformed and is expected to continue alongside €STR (Euro Short Term Rate) European Central Bank
EUR EONIA (EUR) €STR (Euro Short Term Rate) European Central Bank
GBP GBP LIBOR Reformed SONIA (Sterling Overnight Index Average) Bank of England / FCA
CHF CHF LIBOR SARON (Swiss Average Rate Overnight) Swiss National Bank
JPY JPY LIBOR & TIBOR (JPY) TIBOR is being reformed and is expected to continue alongside TONAR (Tokyo Overnight Average Rate) Bank of Japan

(1) The Alternative Reference Rates Committee (ARRC) anticipates SOFR replacing the Effective Federal Funds Rate (EFFR) as the rate used for discounting and Price Alignment Interest (PAI) in the cleared context beginning Q1 2020.

What do we know about these alternative benchmarks?

The current IBORs are calculated by reference to daily submissions by panel banks. These daily submissions are often based on forward looking estimates by the panel banks, whereas most replacement benchmark rates will be based on actual historic transactions.

The alternative RFRs are backward-looking overnight rates (i.e. they are published at the end of the overnight borrowing period). This is different to the IBORs which are forward-looking term rates (i.e. they are published for different periods of time, such as 3 months and 6 months, at the beginning of the borrowing period). The various RFR working groups are considering whether robust forward-looking term versions of the RFRs can be developed. The Working Group on Sterling Risk-Free Reference Rates, for example, anticipates that a term SONIA reference rate could be available in H2 2019. The Alternative Reference Rates Committee (ARRC) in the US is also looking at developing a term SOFR rate by the end of 2021.

These alternative RFRs are administered by the central bank in the relevant jurisdiction.

When will the changes take effect?

This depends on the relevant IBOR. For example, the UK Financial Conduct Authority (FCA) has stated that, after 2021, it will no longer compel banks to submit rates used for the calculation of LIBOR and that firms should treat the discontinuation of LIBOR as something that will happen.

The RFRs for USD, GBP, CHF, and JPY are already published alongside the relevant IBORs. The RFR for EUR (€STR) is expected to be published from October 2019. Certain market participants have started issuing bonds referencing the RFRs. HSBC participated in the first SONIA-based bond offering by the European Investment Bank for GBP 1 billion in June 2018.

For existing transactions that extend beyond 2021, market participants may have to decide whether to replace references to IBORs with references to the alternative benchmarks or use so-called “fallback” provisions to replace references to the IBORs with references to the alternative benchmarks only once the existing IBOR is discontinued. There are industry efforts to standardise the approach, although the industry approach may differ across products.

What do these reforms mean for HSBC clients?

These changes may impact the HSBC products and services you currently use and those we provide in the future, including changes to interest payment and other obligations. The extent of the impact will depend on a range of factors such as the IBOR referenced, the fallbacks (if any) in the product, the date by when the changes will take effect and the nature of the product or service.

For example, if there is a permanent discontinuation of LIBOR and an alternative benchmark is agreed for a credit facility, it is possible that the alternative benchmark may result in changes to the amount payable under the facility.

We are actively monitoring developments and are participating in industry and regulatory working groups. HSBC will provide more detailed information to impacted clients once there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.

What is HSBC doing to understand the potential impact on clients?

HSBC is participating in a number of public and private sector working groups such as the Sterling Risk-Free Rate Working Group, the Alternative Reference Rates Committee in the United States and the Working Group on Euro Risk-Free Rates, each of which was responsible for identifying the preferred risk-free rate for the relevant currency and is now planning transition to that risk-free rate.

HSBC also participates in industry body working groups such as the International Swaps and Derivatives Association, Inc. (ISDA) working groups on the IBORs and the EU Benchmark Regulation (BMR). HSBC may participate in other industry working groups in the future, including those that are considering the impact of LIBOR/IBOR replacement on specific types of products and services to ensure our approach is aligned with industry practice.

What is HSBC doing to mitigate the impact of any change for clients?

HSBC is aware that the discontinuation of LIBOR or other IBORs may impact both its new and existing products and services and that the impact on all parties, including clients, will need to be carefully considered.

HSBC is conducting due diligence to review and confirm how LIBOR and other IBORs are used in HSBC products and services. HSBC is monitoring this situation and, where required, will provide clients with further information.

While HSBC’s internal planning and due diligence on these changes has already started, as noted above, it is not yet possible to accurately determine the precise impact on all parties, including clients, until a replacement for the existing benchmark rates (including the preferred risk-free rate and any necessary adjustments) has been confirmed at industry level and until more information is known on the timing of the changes.

Do HSBC clients need to do anything now?

Although the available information is currently limited, clients may wish to review their existing products – including loans, mortgages and investment products – to check whether any of these reference the affected IBORs or other affected interest rate benchmarks.

We will inform our clients of the impacts of the change on their affected products and services as soon as there is more information available.

For more information

We will periodically update this site and/or provide communications relating to the changes. In the meantime, if you require any further information, please contact your usual Relationship Manager.

If you would like more general information on interest rate reform and IBOR transition, the Financial Conduct Authority (FCA), the Bank of England, the U.S. Commodity Futures and Trading Commission (CFTC), the Federal Reserve Bank of New York (FRBNY), the U.S. Alternative Reference Rates Committee (ARRC), the European Central Bank (ECB), the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and some of the working groups and industry bodies that are considering these issues have published information which can be found on their websites.

Legal Information

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