IBOR Transition to Risk Free Rates
This document is provided by Mizuho Bank, Ltd., Singapore Branch (Bank) to Bank customers concerning the discontinuation of the London Interbank Offered Rate (LIBOR) and to generally outline key aspects of interbank offer rate (IBOR) reform. The information herein is provided solely for information only based on publicly available information believed by us to be reliable at the time of publication. The information provided is not complete or exhaustive and does not constitute legal, regulatory, tax or accounting advice. The Bank is not providing any advice or recommendation. If you wish to receive advice you should obtain your own independent professional advice on the potential impact to you from a financial, legal, accounting and tax perspective following from IBOR reform, including LIBOR discontinuation.
Overview
The London Interbank Offered Rate (LIBOR) is the most widely used benchmark for short-term interest rates and is used as the reference rate for derivatives, bonds, business loans and other financial products. The setting of LIBOR is made daily by submissions of indications of the average rates at which LIBOR panel banks can borrow from other banks on an unsecured basis in five (5) currencies (USD, GBP, EUR, JPY and CHF).
Certain currencies also use specific benchmarks such as the Tokyo Interbank Offered Rate (TIBOR) for JPY and the Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) for the 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. In March 2021, the UK Financial Conduct Authority (FCA) announced that non-USD LIBOR (in all LIBOR settings) and USD LIBOR (in 1-week and 2-month LIBOR settings) will cease to be published immediately after 31 December 2021; and the publication of overnight and 12-month USD LIBOR settings will cease immediately after 30 June 2023.
As a result, the FCA and other regulators are requiring banks to plan for the cessation of LIBOR and are encouraging market participants to transition from IBORs to the use of near risk-free rates (RFRs) that are based on more active and liquid overnight lending markets.
What are the replacement benchmarks?
RFR working groups in several jurisdictions have identified replacement benchmarks and have been developing strategies for transition. Below is a non-exhaustive table of examples of benchmarks being replaced or where changes have/will be made to their methodology.
| Currency | Current Rate | Alternate Rate | Secured or unsecured | Expected Approach |
| CHF | CHF LIBOR | SARON (Swiss Average Rate Overnight) |
Secured overnight funds | Transition to SARON. |
| EUR | EONIA | €STR (Euro Short–Term Rate) |
Unsecured overnight funds | Transition to €STR. EONIA continues to exist under a new methodology to allow a smooth transition to €STR. |
| EUR | EURIBOR or EUR LIBOR | Reformed EURIBOR | Unsecured overnight funds | Multiple rate approach. Reformed EURIBOR is expected to continue alongside €STR. EUR LIBOR will be discontinued with a transition to €STR. |
| GBP | GBP LIBOR | SONIA (Sterling Overnight Index Average) |
Unsecured overnight funds | Transition to SONIA |
| JPY | JPY LIBOR | TONAR (Tokyo Overnight Average Rate) |
Unsecured overnight funds | Multiple rate approach. TIBOR (Tokyo Interbank Offered Rate) is being reformed and is expected to continue alongside TONAR. |
| SGD | SIBOR (Singapore Interbank Offered Rate) |
SIBOR is a pre-existing rate largely used for cash products. Products referencing SIBOR will be expected to transition to SORA (Singapore Overnight Rate Average), which is a pre-existing overnight rate. Further details concerning SORA are discussed below. |
Unsecured funds | SIBOR will discontinue by end-2024 and will transition to SORA. |
| SGD | SOR (Swap Offer Rate) |
SOR is a pre–existing rate largely used in the derivatives market. It is calculated by reference to USD LIBOR. SOR is expected to be replaced by SORA |
Unsecured overnight funds | SOR will discontinue by end June-2023 and will transition to SORA. |
| USD | USD LIBOR | SOFR (Secured Overnight Financing Rate) |
Secured overnight funds | Transition to SOFR. |
Transition from SOR and SIBOR to SORA
SOR is used in SGD interest rate derivatives, and is also widely used in SGD cash market products such as business and syndicated loans.
As the computation of SOR relies on USD LIBOR, the discontinuation of LIBOR will impact the future sustainability of SOR. In this connection, the Association of Banks in Singapore (ABS) and the Singapore Foreign Exchange Market Committee (ABS-SFEMC) has identified SORA as the replacement benchmark rate for SOR.
SIBOR is another interest rate benchmark commonly used in commercial and syndicated loans, trade financing, and working capital financing. SIBOR will also be discontinued and replaced by SORA, in line with the industry shift towards a SORA-centered SGD interest rate market.
SORA is published daily by MAS and reflects the volume-weighted average rate of all SGD overnight cash transactions brokered in the Singapore wholesale (or inter-bank) market. SORA is underpinned by a deep and liquid overnight funding market, and is commonly monitored by money market participants as a reflection of daily conditions in the SGD money markets.
The Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) has been established to oversee an industry-wide interest rate benchmark transition from SOR and SIBOR to SORA; and to steer the development of industry best practices and conventions for the use of SORA in financial products. The Bank will continue to follow industry developments and will engage with customers as the market develops on matters concerning SOR and SIBOR to SORA transition.
Differences between IBORs and RFRs
There are a number of differences between IBORs and RFRs including:
- Rate Determination: RFRs are currently contemplated as backward looking overnight rates based on actual historic transactions whereas IBORs are term rates which are fixed and publicly available at the beginning of each interest period. This means IBORs are forward looking rates.
- Credit and Liquidity Premiums: IBORs include the cost of bank credit risk and term liquidity risk as they are based on the submissions of panel banks indicating where they can borrow unsecured funds in the relevant interbank market, whereas RFRs are based on overnight transactions. Transitioning existing contracts from IBORs to RFRs may involve incorporating a spread on the RFR to account for such risks in IBOR. It is also possible to transition to other alterative rates, e.g. LIBOR to TIBOR, provided this has been provided for by agreement.
What is the Impact of LIBOR Discontinuation to Customers?
LIBOR discontinuation may impact Bank products, such as loans and derivatives, which you currently hold (and those we provide in the future). Some of the impact of LIBOR discontinuation is outlined below.
- Payments under a product may be affected: If payments under a product such as a loan or a derivative are calculated by reference to LIBOR, the consequences of LIBOR discontinuation will depend on the terms of the contract. Depending on the new benchmark applied, and how this benchmark compares to LIBOR, this may mean that payments under that product may be more or less than under LIBOR.
- Value of product may change: A change in benchmark may affect the value of the product which may in turn, result in potential accounting, tax and other implications for you.
- Operations and systems may be affected: If a backward-looking overnight rate is used in place of LIBOR, interest will be calculated at the end of the interest period. Operations, systems and other infrastructure may need to be suitably updated to deal with this change.
- Hedging implications: Potential mismatches of interest rates between products (such as loans and corresponding derivatives for the hedging of interest payment obligations under the loan).
You should seek independent professional advice in relation to the above or any other aspect of LIBOR and/or IBORs and/or RFRs as may affect your products with us.
Impact on derivatives and documentation
The International Swaps and Derivatives Association, Inc. (ISDA), an industry body for derivatives, has updated the standard wording to include new fallback provisions for derivatives referencing LIBOR.
The updated ISDA fallbacks are intended to provide for the occurrence of relevant trigger events (e.g. the permanent discontinuation of LIBOR) where references to LIBOR will be replaced with references to a rate based on the RFR in the same currency.
ISDA has published the ISDA Fallback Protocol and parties have been encouraged to apply the Protocol which amends existing derivatives with other ISDA member counterparties to include the fallbacks in existing derivatives through adherence on the ISDA website.
If you have executed ISDA documentation with the Bank, but have elected not to adhere to the ISDA Fallback Protocol, the Bank will have engaged you to enter into a bilateral amendment agreement in respect of your ISDA documentation with the Bank. This bilateral agreement is intended to effect substantively the same changes as those that would be implemented through adherence to the ISDA Fallback Protocol.
The Bank will continue to communicate with its customers and counterparties with a view to facilitating a smooth LIBOR transition concerning your derivatives products with the Bank.
Impact on loans and documentation
Generally, loan documentation may include fallbacks which apply if LIBOR is unavailable. However, these fallbacks have generally not been drafted in documentation to deal with a permanent discontinuation of LIBOR.
In this connection, the Loan Market Association (LMA) (an industry body focusing on loan markets) as well as the Alternative Reference Rate Committee (ARRC) which was established by the U.S Federal Reserve, have recommended fallback language in loan documentation for loan markets participants. Essentially, the fallback language provides for mechanisms to facilitate a smooth implementation of a replacement benchmark for LIBOR (and other IBORs).
As with derivatives, the Bank has been engaging with Bank customers of loan products, including bilateral and syndicated loans, for the incorporation of fallback provisions into existing loan documentation with the Bank.
Preparations for LIBOR transition
Mizuho Bank, Ltd. is actively preparing for LIBOR transition, participating in industry working groups and working on the development of new products with alternative reference rates. The Bank has been, and will continue to engage its customers individually as the market develops with respect to the changes arising from the transition to new reference rates at an industry level.
In the meantime, you may wish to assess the impact of LIBOR discontinuation on your business, and consider obtaining independent professional advice, as appropriate.
For more information
If you require any further information, please contact your relationship manager.
If you would like more general information on interest rate reform and IBOR transition, the following websites contain useful information:
Bank of England
https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor
Bank of Japan
https://www.boj.or.jp/en/paym/market/sg/index.htm/
Federal Reserve Bank of New York
https://www.newyorkfed.org/arrc
Financial Stability Board
https://www.fsb.org/
ISDA
https://www.isda.org/category/legal/benchmarks/
LMA
https://www.lma.eu.com/libor
The Association of Banks in Singapore
https://abs.org.sg/benchmark-rates/publications