The IBOR reform is the one of most sweeping changes in the capital markets since the introduction of the euro
For decades, interbank offered rates (IBORs) have been used as interest rate benchmarks on the global financial markets. Today, the terms for numerous financial contracts, such as loans, derivatives, securities and bank deposits, are based on these rates.
In 2013, the G20 nations launched a reform of the global system of reference rates. The various IBORs in use are slated for either reform or gradual replacement by risk-free rates (RFRs) or alternative reference rates (ARRs).
EURIBOR (Euro Interbank Offered Rate), one of the major IBORs, has been reformed in line with the BMR and will remain in existence in the medium term. The reform of EURIBOR was completed in November 2019. As a result, EURIBOR can continue to be used as a reference rate.
Given that around USD 370 trillion in financial products currently reference IBORs, the reform is one of the biggest changes in the capital markets since the introduction of the euro.
Preparations for a smooth transition
LBBW has launched a dedicated IBOR reform project. The Bank observes the market constantly to keep abreast of new developments, enabling it to respond to changes and incorporate the resulting insights in the development of new products. LBBW is also a member of various industry IBOR working groups and has been actively working to identify alternatives to EONIA (Euro Overnight Index Average) and address challenges posed by this transition. We aim to capture the complex changes taking place from now until the end of 2021 and guide our customers effortlessly through the reform.
LBBW’s adherence to the ISDA 2020 IBOR Fallbacks Protocol
On 23 October 2020, the International Swaps and Derivatives Association (ISDA) finalized the ISDA 2020 IBOR Fallbacks Protocol, the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA Bilateral Templates, which officially came into force on 25 January 2021.
The ISDA and a number of IBOR working groups and regulators have recommended that market participants adhere to the ISDA 2020 IBOR Fallbacks Protocol in order to reduce the cost of bilateral negotiations on the market.
LBBW signed up to the ISDA 2020 IBOR Fallbacks Protocol on 25 January 2021.
Further information on the ISDA documents and their scope of application, coverage and content can be found further down this page and in summary form on the ISDA website at https://www.isda.org/2021/01/14/countdown-to-new-fallbacks/.
Effects of the IBOR reform on LBBW customers
The reform of the benchmark rates will affect the financial products offered by LBBW, such as securities and derivatives, and lending products. This reform will require adjustments to existing transactions, the introduction of new products and contractual amendments to ensure a smooth rollout of the new reference rates.
Products and services offered by LBBW:
Our customers are our top priority. That is why we are working with a dedicated IBOR reform project team to adjust existing and new business to the new reference rates, identify all the required contractual changes and make all necessary arrangements with you. This will allow us to guide our customers through this extensive transition while maintaining the high standards of our products and services.
LBBW will provide information on this site to keep you up to date on the background to the IBOR reform, the current status of reform initiatives and further developments as they unfold. More information can also be found on the websites of the national IBOR working groups and industry organizations.
If you are an LBBW customer affected by the IBOR transition, LBBW will contact you in due course with concrete information and to discuss any action that needs to be taken.
If you have any questions in the meantime, do not hesitate to contact us at IBOR-Reform@LBBW.de .
Background to the IBOR reform
Interbank offered rates (IBORs) are average interest rates at which banks can raise loans on the interbank market. The terms range from overnight to up to 12 months and the rates are available in various currencies. Total IBOR market exposure is estimated at more than USD 370 trillion. USD LIBOR (London Interbank Offered Rate) and EURIBOR account for approximately 80% of this figure. Apart from USD LIBOR and EURIBOR, the major global IBORs include the UK’s GBP LIBOR, the Swiss CHF LIBOR, the European EUR LIBOR and EONIA as well as the Japanese TIBOR/JPY LIBOR.
To date, IBORs have been set on the basis of expert estimates provided by a number of panel banks. As a result, IBORs are not always based on actual transactions, but also reflect to some extent merely the banks’ conjectures on financing costs. A significant decline in activity on the underlying markets and challenges in relation to the viability of the system of panel banks that submit these benchmarks created a serious risk for both individual financial market players as well as for the stability of the global financial system. That is why the G20 nations launched an earnest reform of the global system of reference rates in 2013.
In 2014, the Financial Stability Board (FSB) published its recommendations for reforming these interest rates. It suggested making the system more reliable by developing alternative reference rates. These new rates would be based, as far as possible, on actual transaction data instead of estimations of borrowing rates submitted by experts from a defined number of banks.
The legal basis for the reform is set out in the EU Benchmark Regulation (BMR), which took effect in the EU on 1 January 2018. New risk-free rates (RFRs), also called alternative reference rates (ARRs) are to replace the IBOR rates.
The old IBORs will either be reformed or gradually replaced by RFRs by the end of 2021.
What is the current status of the reform?
Since IBORs will no longer be published from the beginning of 2022, RFR-based markets must be established by this date. Exceptions to this are the reformed EURIBOR that can continue to be used as reference rate and some tenors of the USD LIBOR (overnight, 1, 3, 6 and 12 months), which will continue to be published until 30 June 2023.
Following the introduction of the SOFR (Secured Overnight Financing Rate), the Swiss SARON (Swiss Average Rate Overnight) and the modernized SONIA (Sterling Overnight Index Average) in the UK, attention turned to EONIA in 2019. The Working Group on Euro Risk-Free Rates hosted by the ECB chose the €STR (euro short-term rate) to replace EONIA. This rate has been published by the ECB since October 2019. EONIA will continue to be published alongside this rate until 3 January 2022. EURIBOR has been reformed to comply with the BMR and will remain in existence for the time being. However, it is currently unclear whether EURIBOR will remain available permanently as market participants may gradually turn to products that are based on an RFR such as the €STR.
On 5 March 2021, the FCA announced the official end of LIBOR or the dates that panel bank submissions for all LIBOR settings will cease or after which representative LIBOR rates will no longer be available ("Index Cessation Effective Dates"):
- immediately after 31 December 2021, the publication of all GBP, EUR, CHF and JPY LIBOR settings will be discontinued and the publication of the 1-week and 2-month USD LIBOR
- immediately after 30 June 2023 the publication of the remaining USD LIBOR settings will be discontinued.
For more information on the FCA's official announcement of the end of LIBOR, please visit the FCA's website at: https://www.fca.org.uk/news/press-releases/announcement
Some countries are further ahead than the EU and developments will take a different course in the different currencies and jurisdictions.
Alternative reference rates and working groups around the world
Despite regulators around the world putting the IBOR transition on their agendas, the transition is being driven largely by market players themselves. Working groups in numerous countries are actively engaged in this global transition from the old IBORs to the newly defined alternative reference rates.
In the EU, the ECB launched a working group comprising representatives from banks, associations and other institutions to formulate recommendations for euro risk-free rates and for their implementation (ECB Working Group on Euro Risk-Free Rates). In fall 2018, this working group proposed the €STR as the new reference rate for the euro. The €STR has been set by the ECB since 2 October 2019 and is published daily.
There are comparable working groups in numerous countries which all pursue the objective of acting as a catalyst in the transition away from the previous benchmarks to RFRs. In addition to the €STR as a new risk-free rate for the euro, SOFR (US), SARON (CH) and the reformed SONIA (UK) have been adopted as the respective RFR.
Alternative reference rates (ARRs) and working groups worldwide
|Responsibility||IBORs||ARR||Description||Secured vs. unsecured||Working group||Rate administrator||Availability|
|USA||USD LIBOR||Secured Overnight Financing Rate (SOFR).||
- Covers multiple repo market segments, allowing for future market evolution
|Secured||Alternative Reference Rate Committee (ARRC)||Federal Reserve Bank of New York (FRBNY)||Available since 3 April 2018|
|UK||GBP LIBOR||Reformed Sterling Overnight Index Average (SONIA).||
- Covers overnight wholesale deposit transactions
|Unsecured||Working Group on Sterling Risk-Free Reference Rates||Bank of England||Available since 23 April 2018|
Reformed (hybrid) EURIBOR
Euro short-term rate (€STR).
- Reflects the wholesale euro unsecured overnight borrowing costs of euro area banks
- EURIBOR has been reformed according to the BMR and continues to exist
|Unsecured||The Working Group on Euro Risk-Free Rates||
EMMI approved administrator for hybrid EURIBOR.
European Central Bank approved administrator for €STR
|Published since 2 October 2019|
|CH||CHF LIBOR||Swiss Average Rate Overnight (SARON).||
- Secured rate that reflects interest paid on interbank overnight repo
|Secured||National Working Group on Swiss Franc Reference Rates (NWG)||SIX Swiss Exchange||Became the reference interbank overnight repo on 25 August 2009|
|Tokyo Overnight Average Rate (TONA).||
- Uncollateralized overnight call rate market
|Unsecured||Cross-Industry Committee on Japanese Yen Interest Rates Benchmarks||Bank of Japan||Available since 1 November 1997|
Differences between RFRs and IBORs
IBORs are set by reference to judgment-based submissions by a defined number of panel banks. As such, the current forward-looking IBOR interest rates inherently contain a forward margin to reflect the risk of future interest rate changes and a credit spread.
In contrast, the new RFRs are based on overnight borrowing rates and are calculated retrospectively. The new RFRs are not set on the basis of expert opinions from panel banks but are derived from actual transactions. Since RFRs reference actual transactions, in the majority of currency zones (except for the CHF currency area) they are published daily with a one-day lag. As a result, the interest rate for the interest period cannot be determined until the end of the fixed-interest period.
What challenges does the reform pose for markets and market participants?
The reform of the system of reference rates is heralding sweeping changes for markets and market participants as well as challenges and uncertainty.
- While the current IBOR fixings allow the next interest rate payment to be determined at the beginning of the period (forward-looking approach), the benchmark based on the new RFRs will not be set until the end of the interest period (backward-looking approach) since the new RFRs are based on actual transactions. In order to transition from a forward-looking to a backward-looking approach (see the chart), numerous bank and customer IT systems and transactions will need to be modified.
- A large number of business divisions, processes and technologies are affected, necessitating the large-scale deployment of resources and adjustments.
- In order to ensure a smooth transition to the alternative reference rates, adequate market liquidity is essential, especially on derivatives markets.
- The reform may require changes in taxes and financial reporting.
- The change in interest rates may necessitate changes in valuation and hedging.
- Existing regulatory requirements can make the transition to alternative reference rates even more complex.
- Since the conversion to alternative reference rates affects several economic sectors and different currency areas, it is vital that reform activities are coordinated and carried out in parallel in order to achieve a controlled transition.
- The market infrastructure at all trading venues and clearing houses need to be overhauled.
- Affected institutions must have reliable governance structures in place to enable a smooth transition across all relevant business units.
ISDA 2020 IBOR Fallbacks Protocol, IBOR Fallbacks Supplement and ISDA Bilateral Templates
Scope of application of the ISDA documents
The documents differ in terms of their scope of application and content but have the same objective: to make it easier for financial market participants to apply the fallbacks defined by the ISDA to the affected transactions and hence transition from the old IBORs to new, alternative reference rates.
While the ISDA IBOR Fallbacks Supplement to the 2006 ISDA Definitions applies only to new transactions, the application of the ISDA IBOR Fallbacks Supplement regulations can be integrated into existing contracts by adhering to the ISDA IBOR Fallbacks Protocol. This allows the regulations to be applied to existing transactions providing that both counterparties have signed up to the Protocol.
The documents cover only IBOR rates. Transactions linked to EONIA can be transitioned to the corresponding successor references using the Bilateral Template EONIA Amendment Agreement.
The following reference rates are covered by the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol:
|Europe||EUR LIBOR / EURIBOR|
|Japan||JPY LIBOR / TIBOR / EuroYen TIBOR|
|Australia||AUD BBSW (Bank Bill Swap Rate)|
|Canada||CDOR (Canadian Dollar Offered Rate)|
|Hong Kong||HIBOR (Hong Kong Interbank Offered Rate)|
|Singapore||SOR (Singapore Swap Offered Rate)|
|Thailand||THBFIX (Thai Baht Interest Rate Fixing)|
Overview of the IBOR Fallbacks Supplement to the 2006 Definitions, the ISDA 2020 IBOR Fallbacks Protocol and the ISDA Bilateral Templates
The following ISDA documents officially came into force on 25 January 2021
IBOR Fallbacks Supplement
Scope of application
- Contains amendments to the 2006 ISDA Definitions implementing the new fallback mechanisms for new transactions linked to IBORs that come into force on 25 January 2021.
- The IBOR Fallbacks Supplement to the 2006 ISDA Definitions solely covers IBOR rates.
- It defines the specific fallbacks that apply in the event of the temporary or permanent cessation or the announcement of the future cessation of an IBOR rate.
- This includes the definition of a successor rate and a method for calculating spreads.
ISDA 2020 IBOR Fallbacks Protocol
Scope of application
- The ISDA 2020 IBOR Fallbacks Protocol applies solely to transactions already concluded and requires bilateral adherence on the part of the counterparties.
- It applies to all products under the corresponding “Protocol Covered Documents”.
- Serves as an aid for the multilateral implementation of the IBOR Fallbacks Supplement regulations for existing transactions (implements the fallbacks from the IBOR Fallbacks Supplement in existing transactions).
- The ISDA 2020 IBOR Fallbacks Protocol allows market participants to apply the amended 2006 ISDA Definition and the corresponding regulations to existing bilateral business with counterparties that also adhere to the ISDA 2020 IBOR Fallbacks Protocol.
- At the same time, there is also an option to modify the individual transactions by way of a separate bilateral agreement.
ISDA 2020 Bilateral Templates
Scope of application
- Can be used to amend the ISDA 2020 IBOR Fallbacks Protocol to include additional agreements/interest rates and to exclude individual transactions from the Protocol.
- Allows the parties to transition existing transactions from IBORs to the successor references in the form of an amendment agreement without having to adhere to the ISDA 2020 IBOR Fallbacks Protocol.
- If one of the counterparties does not adhere to the Protocol, this must be agreed bilaterally using one of the various templates that are available.
IBORs (interbank offered rates) are average interest rates at which banks can raise loans on the interbank market. The terms range from overnight to up to 12 months and the rates are available in various currencies. IBORs play a key role on the global financial markets because the terms and conditions of numerous loans, derivatives, securities and bank deposits refer to these benchmarks. Total IBOR market exposure is estimated at some USD 370 trillion. USD LIBOR and EURIBOR account for approximately 80% of this figure.
Apart from USD LIBOR and EURIBOR, the major global LIBORs include the UK’s GBP LIBOR, the Swiss CHF LIBOR, the European EUR LIBOR and EONIA as well as the Japanese TIBOR/JPY LIBOR.
Due to the Benchmarks Regulation (BMR) that became effective on 1 January 2018, the IBOR benchmarks (e.g., EURIBOR, LIBOR, EONIA) are currently being replaced by new reference rates or reformed in line with the regulation. New risk-free rates (RFRs) will replace the old IBOR rates by the end of 2021. These are often also referred to as alternative reference rates (ARRs).
In 2014, the Financial Stability Board (FSB) published its recommendations for reforming these interest rates. Diminished activity on the underlying markets and challenges in relation to the viability of the system of panel banks that submit these benchmarks created a serious risk for both individual users as well as for the stability of the global financial system.
The global system of reference rates is to be made more reliable by developing alternative, virtually risk-free reference rates. To achieve this, the new rates will be based on actual transaction data instead of estimations of rates submitted by experts from a defined number of banks.
The old LIBORs are either being reformed or gradually replaced by risk-free rates (RFRs).
There is a transition period until the end of 2021 for reference rates that are being retired, such as EONIA, as well as the third-country benchmarks USD LIBOR, GBP LIBOR, CHF LIBOR and TIBOR. EURIBOR has been reformed and, as things currently stand, will be remain in existence until the end of 2025.
Given that around USD 370 trillion in financial products currently reference IBORs, the reform is one of the biggest changes in the capital markets since the introduction of the euro.
The reform of the system of reference rates is heralding sweeping changes for markets and market participants. It is impacting the value chains of a wide range of products from start to finish.
Since IBORs will no longer be published from the beginning of 2022, RFR-based markets need to be established by this date. Following the introduction of SOFR (US), SARON (CH) and the modernized SONIA (UK), attention turned to EONIA in 2019. The Working Group on Euro Risk-Free Rates convened by the ECB chose the €STR as the new benchmark. This rate has been published by the ECB since October 2019. EONIA will continue to be published alongside this rate until 3 January 2022. EURIBOR has been reformed to comply with the BMR and will remain in existence for the time being. However, it is currently unclear whether EURIBOR will remain available permanently as market participants may gradually turn to products that are based on an RFR such as the €STR.
In its original form, EONIA was not compliant with the requirements of the BMR due to the lack of underlying transactions and the high concentration of volumes on a small number of players. The European Money Markets Institute (EMMI), as administrator of EONIA, therefore announced that EONIA would be discontinued on 3 January 2022. In October 2019, the ECB began publishing the €STR recommended by the working group as the new RFR in the euro area.
To ease the transition for market participants, since October 2019, the ECB has recalibrated EONIA, linking it directly to the €STR. Since this date, EONIA has been calculated using a reformed methodology tracking the €STR plus a fixed spread of 8.5 basis points.
The €STR (euro short-term rate) is based on unsecured money market transactions. The €STR is calculated based on euro transactions of participating banks reported by these banks to the ECB in accordance with the Money Market Statistical Reporting (MMSR) Regulation. The €STR is published on each TARGET2 business day based on transactions conducted and settled on the previous day.
To successfully transition the standard benchmark from EONIA to the €STR, all market participants should gradually replace EONIA with the €STR or another BMR-compliant reference rate such as EURIBOR for all affected products and contracts.
Changing the reference rate requires meticulous preparation and involves adapting affected IT systems and performing a review of all existing documentation, processes, balance sheet valuations and accounting methods.
On 2 July 2019, the Financial Services and Markets Authority (FSMA) announced that EMMI can continue to publish the reformed EURIBOR, i.e., there is currently no need to replace EURIBOR with an alternative interest rate.
This move came in response to EMMI’s change to the method for calculating EURIBOR. By using a hybrid methodology, the reformed EURIBOR is grounded to a greater extent in real market transactions and therefore meets the requirements set out in the BMR.
However, it is still unclear whether EURIBOR will remain available permanently as market participants may gradually turn to products that are based on an RFR such as the €STR. At present, it is assumed that the reformed EURIBOR will remain in existence until the end of 2025.
Further information on the IBOR reform
You can find further useful information on the IBOR reform on the websites of the national IBOR working groups and industry organizations
- ECB Working Group on Euro Risk-Free Rates
- Alternative Reference Rates Committee (ARRC), working group convened by the Federal Reserve Board and New York Fed
- Working Group on Sterling Risk-Free Reference Rates, convened by the Bank of England
- National Working Group on Swiss Franc Reference Rates, convened by the Swiss National Bank
- Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks , working group convened by the Bank of Japan
- ISDA Benchmark Committee and working groups