Changes to Interbank Offered Rates (IBORS) and other benchmark rates

September 2019

Certain interest rate benchmarks are, or may in the future become, subject to ongoing international, national and other regulatory guidance, reform and proposals for reform.  

Interest rate benchmarks that are currently the subject of proposals for reform include U.S. dollar LIBOR, British pound sterling LIBOR, Swiss Franc LIBOR, Japanese Yen TIBOR, Japanese Yen LIBOR, EUR LIBOR, EURIBOR, Euro Yen TIBOR, Canadian Dollar CDOR, Hong Kong Dollar HIBOR and Australian Dollar BBSW (“IBORS”). Regulators have signalled the need to use alternative benchmark reference rates and the U.K. Financial Conduct Authority has emphasized the need to transition away from LIBOR before the end of 2021. As a result, existing benchmark rates may not comply with applicable laws and regulations (such as the European Benchmark Regulation), may be permanently discontinued or the basis on which they are calculated may change.

It is not yet certain how or to what extent any alternative benchmark rates will be developed or applied to financial products. Parties entering into transactions that use IBORS as benchmarks are exposed to the risk that the reforms and/or transition processes may:

i. result in the discontinuation of one or more IBORs;

ii. result in one or more IBORs performing differently than in the past;

iii. require a need to determine or agree a successor or alternative reference rate;

iv. require adjustments to the identified fallback alternative reference rate, which may include  incorporation of a term structure methodology, the addition of a credit spread component, and any other applicable modifications ;

v. require legacy financial products, trading agreement(s), contracts and confirmations to be updated;

vi. result in a mismatch between the rate referenced in one instrument such as a bond or loan and that referenced in another instrument such as a derivative, including where the derivative is intended to operate as a hedge; and/or

vii. have other adverse effects or unforeseen consequences.

Even with spreads or other adjustments, alternative reference rates may be only an estimate or be an approximation of the relevant IBOR, may not be subject to continued verification against the relevant IBOR if it is suspended, discontinued or unavailable, and may not result in a rate that is the economic equivalent of the specific IBORs used in a transaction.

Any of the reforms and related transition actions, and/or any delay or uncertainty regarding them, or any failure of an alternative reference rate to be developed or gain market acceptance, could adversely affect IBOR-based obligations and investments and their economics, including the price, value or liquidity of IBOR-based obligations and investments, their usefulness for the intended purpose, the timing or amount of payments or deliveries and, if applicable, the likelihood that an investor will be able to exercise any option rights tied to IBOR levels .

Please note that, while the matters discussed in this Disclosure are focused on IBORS, they may be of equal relevance or applicability to reform efforts that may be undertaken in the future with respect to other interest rate benchmarks.

You should consult your own independent professional advisers and/or conduct your own independent investigation and analysis on the potential risks imposed by the reforms and the potential impact on your transactions.

Please note that this Disclosure must not be construed as legal, financial, tax, accounting or other advice. This Disclosure is not, and is not intended to be, a “research report”, “investment research” or “independent research” as may be defined in applicable laws and regulations worldwide. 

 

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