Interbank offered rate (IBOR), the journey ahead

The Interbank offered rate (IBOR) replacement represents one of the major undertakings for the financial services industry in the coming years. To support our clients in this endeavour, Deloitte has established a team of experts in Switzerland, which brings strong expertise in areas such as risk management, regulatory change, tax and legal. The team also draws from the experience of our colleagues in other key financial markets such as London, New York, Frankfurt and Tokyo. We aim to support our local and global clients in their IBOR replacement journey by conducting impact assessments, designing change solutions, planning the transition, and ultimately implementing the new alternative reference rate.

Devolution of IBOR

The need for Interbank offered rates (IBORs) transition was primarily triggered due to the fraud and conspiracy scandals surrounding LIBOR during the last financial crisis. In 2014, due to IBOR’s sustainability concerns in the unsecured banking market, the Financial Stability Board (FSB) opined to look into risk-free reference rates (RFRs) as alternatives to IBORs. The UK’s Financial Conduct Authority (FCA) announcement in 2017 that they will no longer compel or persuade banks to submit quotes to support the London Interbank Offered Rate (LIBOR) after 2021 was a cornerstone in setting the pace to replace IBORs.

Working Groups at national and international levels have been set-up to define the alternative RFRs, to outline challenges and roadmaps around the proposed transition to market participants. With the recent selection of the Euro Short Term Rate (ESTER) to replace EURIBOR, Alternative Reference Rates (ARRs) for five major currencies (USD, GBP, EUR, CHF, and JPY) have been established. In Switzerland, the National Working Group on Swiss Franc Reference Rates foresees the Swiss Average Rate Overnight (SARON) as the Swiss solution. SARON is an overnight secured reference price based on transactions and quotes of the Swiss Repo market.

Total notional volumes outstanding for reference rates (based on 2017 estimation)

The transition away from IBORs to RFRs impacts financial services firms, corporates as well as the customers and will change the market environment as a whole. Considering the scale and size of the transition and it’s implications, a clear awareness of the ongoing transition is of key importance. This has been further placed under the spotlight with the letters written to CEO’s of major banks and insurers as of 19 September 2018 by the FCA and Prudential Regulation Authority (PRA) requesting the submission of a board approved summary of the transition plan by 14 December 2018.

Deloitte possesses profound know-how and experience in regulatory transformations. We continuously leverage our global network to keep pace with industry pain points. As the ARR is not a direct replacement of the IBOR, our objective is to support clients to identify their IBOR specific challenges and define a roadmap for an orderly, efficient and coordinated transition.

We will continuously publish IBOR specific blogs, sharing our experiences, knowledge and insights on implementation challenges as well as keeping our readers up-to-date with regards to changes in the regulatory environment.

IBOR Insights

14.11.2019 - IBOR Transition: Fallback provisions and spread adjustments

The transition from interbank offered rates (IBORs) to new alternative risk-free rates (RFRs) marks a historic turning point in financial markets. With cessation of LIBOR expected for the end of 2021, banks and other financial players need to focus on suitable transition planning. Swiss banks have already gained some experience in this regard, with the transition from the Tomorrow/Next Indexed Swaps (TOIS) fixing to the Swiss Average Rate Overnight (SARON); but the replacement of CHF LIBOR will be far more complex due to its importance as the basis for pricing Swiss loans. A large proportion of financial contracts referencing CHF LIBOR has maturity dates beyond 2021, so fallback provisions need to be high on the transition agenda of Swiss banks, to ensure contract continuity.

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26.06.2019 - Compression auctions as tool to avoid a hard “IBOR-exit”

The IBOR transition is now well under way on the derivative front, and some key steps have been taken in identifying various LIBOR replacements. The next challenge will be shaping the derivatives market for the new benchmark rates. Preliminary assessments have been undertaken to assess potential replacements for LIBOR derivatives.

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15.04.2019 - (L)IBOR reform regulatory scrutiny – increasing the pressure

A number of key financial regulators around the globe are increasing the pressure on supervised firms to respond to the need to transition away from interbank offered rates (IBORs).

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21.02.2019 - What are the transfer pricing implications of the IBOR transition journey?

In July 2017, the Chief Executive of the UK Financial Conduct Authority (FCA) announced that firms should discontinue the use of the London Interbank Offered Rate (LIBOR) in favour of overnight risk-free rates (RFRs). Although registered and administered in the UK, LIBOR is a benchmark that underpins contracts affecting banks, asset managers, insurers and corporates globally. The transition must be completed by the end of 2021, as the continuation of LIBOR will not be guaranteed to market participants after that date.

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14.02.2019 - The cruise to SARON is departing: Mobilise a transition roadmap

As the journey to transition away from the London Interbank Offered Rate (LIBOR) continues to move forward, supervisors across jurisdictions have started approaching institutions to gain insights into their operational readiness. In Switzerland, a wide range of products with substantial contract volume is tied to LIBOR. This includes lending products such as mortgages and derivatives.

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07.12.2018 - LIBOR to SARON – A challenging and different transition

London interbank offered rate (LIBOR) is a UK regulated and administered comprehensive set of benchmarks across a number of standard maturities and major currencies. Given how pervasive LIBOR is in the global financial system, any discontinuation of LIBOR will have far reaching implications. 2018 has seen regulators increasing pressure on firms to prepare for the transition away from LIBOR to new risk-free/nearly risk-free rates (RFRs). While new interest rate derivatives and cash markets continue referencing LIBOR, public authorities and private sector working groups have jointly selected overnight RFRs options that are being adopted by market participants. The adoption of RFRs though remains at a low level to date.

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25.10.2018 - IBOR, the journey ahead

Interbank offered rates (IBORs) have served for decades as the reference rate at which banks borrow in the interbank market. During the last financial crisis however, significant fraud and conspiracy connected to the rate submissions led to the London Interbank Offered Rate (LIBOR) scandal. This triggered concerns on the sustainability of certain IBORs in the unsecured bank funding market. In 2013, the Financial Stability Board (FSB) started reviewing major interest rate benchmarks due to concerns on their reliability and robustness. In 2014, the FSB opined that risk-free reference rates (RFRs) could be more suitable than reference rates containing a term credit risk component.In November 2017, the UK’s Financial Conduct Authority (FCA) accelerated the need for financial institutions to move to alternative reference rates (ARRs) by announcing that they will no longer compel or persuade banks to submit quotes to support the LIBOR after 2021.

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