IBOR discontinuance

Important disclaimer

• The following is provided for information purposes only.

  The following is provided for information purposes only. It does not constitute advice (including legal, tax, accounting or regulatory advice). No representation is made as to its completeness, accuracy or suitability for any purpose. Recipients should take such professional advice in relation to the matters discussed as they deem appropriate to their circumstances.

• LIBOR reform

  The Financial Conduct Authority (the ‘FCA’) announced in 2017 that it would no longer seek to compel or persuade panel banks to submit the rates required to calculate LIBOR after the end of 2021.  All market participants should now have removed dependencies on LIBOR and completed a transition to alternative reference rates, with the exception of the majority of USD LIBOR benchmarks which will continue to be published until 30 June 2023.

  Investec Bank plc has successfully completed its transition away from GBP LIBOR and will shortly commence work on the transition away from the remaining USD LIBOR benchmarks.  We will work with our clients and other parties to ensure that the process is managed as smoothly as possible.  If you require any further information or have any questions or concerns relating to USD LIBOR transition, we would encourage you to contact your usual Investec representative.

• What is LIBOR?

  The London Interbank Offered Rate (“LIBOR”) was one of the most widely referencing interest rate benchmarks, estimated to underpin $300tn ($30tn in GBP markets) of financial contracts including derivatives, bonds and loans.

  LIBOR was a measure of the average rate at which banks were willing to borrow wholesale unsecured funds. It was calculated and published daily by the Intercontinental Exchange (ICE) Benchmark Administrator based on submissions from twenty selected panel banks. It was published in GBP (British Pound), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc), and across a range of seven tenors (overnight/spot next, one week, one month, two months, three months, six months and 12 months).  As previously mentioned, while LIBOR has ceased to be published in the aforementioned currencies, the majority of USD LIBOR benchmarks will continue to be published until 30 June 2023, however regulators warned market participants that USD LIBOR was not to be used in new contracts after 31 December 2021.

• Why does LIBOR need to be replaced?

  Since 2014, global financial regulatory authorities had expressed concerns about the reliability and robustness of existing interbank benchmark rates. In 2017, both the FCA and the Bank of England noted that it had become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions raised serious questions about the future sustainability of the LIBOR benchmarks. Without sufficient transaction data, LIBOR submissions made by banks to sustain the LIBOR rate were increasingly based on expert judgement of panel banks rather than actual transactions, which heightened the risk of benchmark manipulation. RFRs on the other hand are based on more liquid overnight lending markets. 

  On the 5th March 2021, the Financial Conduct Authority published the pre-cessation announcement, which confirmed the dates on which LIBOR would cease to be published.

• What is the difference between USD LIBOR and SOFR/Term SOFR?

  The differences between USD LIBOR and SOFR are as follows;

  • USD LIBOR is a forward- looking rate published for a range of tenors and at the beginning of the borrowing period. Conversely, SOFR is an overnight rate and measures the cost of borrowing cash overnight collateralised by Treasury securities.

  • USD LIBOR is a forward-looking rate which includes a credit element to reflect the costs and risks of lending over a period of time.  The credit element is not included within SOFR as it is a backward- looking overnight rate, based on real transactions.

  • Where SOFR is the preferred replacement rate, a credit adjustment spread will be applied to the remediation of the existing lending agreement in order to minimise value transfer (either way) between Investec and the client over the remaining contractual term of the loan 

• What is the difference between SOFR and Term SOFR?

  The difference between SOFR and Term SOFR are as follows:

  • Term SOFR is derived using a benchmark methodology including the use of SOFR futures, which compound and annualise the daily overnight SOFR rates

  • Term SOFR rates are therefore forward-looking interest rate estimates of overnight SOFR calculated for specific periods. This enables borrowers and lenders to know the benchmark interest rate at the beginning of each interest period, in a similar way as with USD LIBOR

  • However, it should be noted that neither SOFR & Term SOFR, unlike USD LIBOR, contain any credit sensitivity component or term liquidity premium. As noted above, a credit adjustment spread between SOFR/Term SOFR and USD LIBOR will be applied in both cases 

• When will the transition take place?

  The remaining 5 US dollar LIBOR settings will continue to be calculated using panel bank submissions until 30 June 2023, after this date they will cease to be published.

  We will commence work in the coming weeks/months to complete the successful transition away from US LIBOR for legacy accounts.  

• What does LIBOR transition mean for customers?

  The transition to alternative interest rate benchmarks will impact a range of transactions and products. You should expect to be affected if you have a contract with Investec that is linked or may be linked to USD LIBOR. This could include a floating rate loan, bond, deposit or derivative.

  There are differences between USD LIBOR and the proposed alternative interest rates and, as a result, the transition may have pricing, cashflow, accounting and operational implications for you and/or your business. The transition of existing USD LIBOR based contracts to contracts referencing the alternative rates may involve the payment of a spread adjustment. 

  We will contact you in the coming months with to discuss existing legacy benchmark- based transactions or products.

• What is Investec doing to understand the potential impact on clients?

  Since the announcement, Investec has worked closely with its regulators, market participants and industry to make sure the transition is as smooth as possible for its clients.  We have successfully completed the transition of our legacy book away from GBP LIBOR and will commence communications with clients who hold USD LIBOR linked transactions in the coming months.

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

  Investec supports the market transition from USD LIBOR and is committed to working closely with its clients to ensure they are aware of and understand the potential impacts. 

  Investec recognises the complexity and scale of the USD LIBOR transformation programme and is developing a comprehensive internal USD LIBOR transition project plan to manage the associated risks. 

• What should you do now?

  There are a number of potential steps that you may wish to take now:

  • Review the latest industry information available on USD LIBOR discontinuation

  • Identify any transactions you have that are based on USD LIBOR

  • Evaluate the potential impacts that the move from USD LIBOR to an alternative benchmark rate may have on your business 

  • Consider seeking advice from your financial and/or legal advisers

  • This is not considered to be an exhaustive list, but rather some initial considerations as a starting point for your migration away from USD LIBOR.

• Where can you find more information?

  More information on the transition away from LIBOR is available from the FCA: 

  https://www.fca.org.uk/news/press-releases/announcements-end-libor

  Information specifically in relation to the transition away from USD LIBOR is available here:

  https://www.newyorkfed.org/arrc