Interest rate benchmarks such as interbank offered rates (IBORs) play a key role in global financial markets and are widely used with financial products such as derivatives and loans. However, work is underway in multiple jurisdictions to transition to alternative risk-free rates (RFRs). Several reasons have driven this move, including -
These factors could lead to rate manipulation and increasing concern over the appropriateness of these rates especially in stressed market conditions.
Alternative RFRs were selected, by Financial Stability Board (FSB) working groups, in key currency jurisdictions, with the objective that such rates will be based on liquid underlying market transactions, as opposed to depending on submissions based on judgement. Alternative RFRs will increase reliability for products and transactions that do not need to incorporate a credit risk premium. This has led to uncertainty about the long-term viability of some existing interest rate benchmarks.
The London Interbank Offered Rate (LIBOR) is the average interbank interest rate at which panel banks on the London money market are prepared to lend to one another, on a secured basis. It is calculated by the ICE Benchmark Administration Limited (IBA)1 and published on each working day at 11.55am GMT by Thomson Reuters. It is produced for five currencies (GBP, USD, EUR, CHF, JPY) and seven tenors (overnight/spot next, 1 week, 1 month, 2 months, 3 months, 6 months and 12 months). Up to 16 panel banks for each currency submit their rates based on transactions, transaction derived data and expert judgement. The published rate is the trimmed mean of the individual submissions. The benchmark rates vulnerability revealed in the wake of the 2012 LIBOR scandal signalled the beginning of the benchmark reform globally. The interest rate benchmark LIBOR ceased in two phases from the end of 2021 and therefore other alternative rates must now be considered. This transition may give rise to tax, accounting and legal consequences that should be considered. These consequences are discussed below.
The diverse implications of the IBOR reform could potentially impact many aspects of a business. It is therefore imperative that urgent attention be afforded to any qualifying transactions in order to assess whether there will be any potential consequences of the IBOR reform and that any necessary changes are made to legal agreements and other documents underpinning the underlying transaction.
1 The administrator for LIBOR
2 In September 2019 the IASB published “Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)”, The amendments are mandatory and effective for annual periods beginning on or after 1 January 2020
3 In August 2020, the IASB issued Interest Rate Benchmark Reform—Phase 2 which amends IFRS 9, 7, 4, 16 and IAS 39. The amendments are mandatory and effective for annual periods beginning on or after 1 January 2021
4 In August 2020, the IASB issued Interest Rate Benchmark Reform—Phase 2 which amends IFRS 9, 7, 4, 16 and IAS 39. The amendments are mandatory and effective for annual periods beginning on or after 1 January 2021