LIBOR
This page has been created to inform you about the discontinuation of “IBORs”. Its contents will be updated regularly.
Last updated: March 2021
Introduction
The London Interbank Offered Rate (“LIBOR”) and certain other interbank rates (Interbank Offered Rates, defined hereafter, along with LIBOR, as “IBORs”), which have been in global use for over 30 years as a benchmark index for setting interest rates, are being phased out gradually by the end of 2021. These rates represent the average of the responses provided by a selection of big banks to the question: “At what rate do you think the other banks would lend you money?” They represent the interest rates on unsecured interbank loans.
In 2017, the Financial Conduct Authority (the UK regulator) in effect announced that the big panel banks would no longer be obliged to submit their rates to it beyond 2021. The expected consequence is that the majority of these banks, if not all, will no longer submit their rates. If it is still published, LIBOR therefore risks no longer being representative. Against this backdrop, we need to prepare for the transition to the alternative reference rates identified by the market to replace IBORs in the various currencies concerned; these rates will henceforth be based on real market transactions.
All financial instruments, financial contracts and loans referencing one or more IBORs and due to mature after 2021 will therefore have to be adapted to reflect different reference rates.
The Pictet Group is keeping a close eye on market developments and on the announcements by the regulators in each of the jurisdictions concerned and by the working groups dealing with the different currencies.
Alternative reference rates
Unlike IBORs, which are forward rates (e.g. GBP 3-month LIBOR), the alternative reference rates are calculated on a daily basis. It will therefore be necessary to make adjustments so that they can be used as substitute rates. It should be noted that discussions are currently under way with the aim of developing new maturities in certain currencies.
Owing to their different structure, the alternative rates have different economic impacts compared with IBORs, for each of the currencies. Furthermore, the liquidity of products that use alternative reference rates is improving but is still weak compared with the existing liquidity of products referencing an IBOR.
Please find below a list of the main IBORs and the alternative reference rates that will replace them, as well as their respective administrators.
| Existing rate | Alternative rate | Administrator |
|---|---|---|
| EUR LIBOR | Euro Short Term Rate (ESTER) | European Central Bank |
| USD LIBOR | Secured Overnight Financing Rate (SOFR) | Federal Reserve Bank of New York |
| GBP LIBOR | Sterling Overnight Interbank Average Rate (SONIA) | Bank of England |
| CHF LIBOR | Swiss Average Rate Overnight (SARON) | SIX Swiss Exchange |
| JPY LIBOR / TIBOR | Tokyo Overnight Average Rate (TONAR) | Bank of Japan |
Discontinuing IBORs: effects on financial instruments
From a product perspective (with the exception of Lombard loans), the forthcoming discontinuation of IBORs will mainly have an impact when:
- The product’s price or remuneration is based on an IBOR, as is the case with bonds, structured products and derivatives, for example.
When IBORs stop being published, the price and/or remuneration of the product will no longer be calculated on the basis of an IBOR but on that of an alternative reference rate determined in advance. It should be noted that the documentation relating to most financial products does not yet include provisions on replacing IBORs with alternative reference rates.
Given the differences between IBORs and alternative reference rates, switching current financial contracts over to the new system will have an impact (positive or negative), particularly on the effectiveness of hedging transactions. - Product performance is compared to an IBOR, as is the case for some investment funds. A new benchmark index will therefore have to be used to compare the product's performance. In such a case, discontinuing the IBOR will have no impact on the product’s price or remuneration.
Consequences for Lombard loans of transitioning away from IBOR rates
Lombard loans granted by the Pictet group are indexed to the Pictet Prime Rate (PPR), which has an IBOR component. As IBOR rates are on their way out, the Pictet group has decided, within the terms of outstanding loan agreements, to use the alternative reference rates picked by the market for the various currencies in question.
| Loan facility currency | Current rate | Alternative reference rates applicable from 1 April 2021 | |
|---|---|---|---|
| Risk-free rates | Code | ||
| AUD | 3-month AUD Bank Bills Rate | Reserve Bank of Australia Official Cash Rate | RBACOR |
| CAD | 3-month Canada BA | Canadian Overnight Repo Rate Average | CORRA |
| CHF | 3-month Libor | Swiss Average Rate Overnight | SARON |
| EUR | 3-month Euribor | Euro Short-Term Rate | ESTR or €STR |
| GBP | 3-month Libor | Sterling Overnight Index Average | SONIA |
| HKD | 3-month Hibor | HKD Overnight Index Average | HONIA |
| JPY | 3-month Libor | Tokyo Overnight Average Rate | TONAR |
| SGD | 3-month Sibor | Singapore Overnight Rate Average | SORA |
| USD | 3-month Libor | Secured Overnight Financing Rate | SOFR |
These new rates are calculated daily and need to be adjusted for medium- or long-term transactions such as Lombard loans. A further adjustment is required to factor in credit risk. In that respect, the International Swaps and Derivatives Association (ISDA) recommends adding a spread to each rate so it can be used in the place of IBOR rates.
To safeguard the interests of clients, the Pictet group will use the ISDA methodology. Rather than applying a different spread to each currency, the Group will set a single spread applicable to all currencies, based on the 3-month USD rate rounded to the nearest 0.05%. For example, a flat-rate adjustment of 0.25% will be applied to all the alternative reference rates above.
Business commission will be unchanged. Likewise, a minimum rate of 0% will continue to be applied.
Please note that outstanding term loans will not be affected by these changes.
Steps being taken by the Pictet Group
The Pictet Group undertakes to keep its clients regularly informed about all future changes relating to this topic. This page will be regularly updated for this purpose.Your asset manager or relationship manager will be happy to provide you with further information on the subject.
EMMI-EURIBOR: Euribor®, Eonia® and Eurepo® are registered trademarks of EMMI a.i.s.b.l. All rights reserved. All use of these names must indicate that the index is a registered trademark.p>ICE-LIBOR: The index data referenced herein is the property of ICE Data Indices, LLC, its affiliates (“ICE Data”) and/or its Third-Party Suppliers and has been licensed for use by the Pictet Group. ICE Data and its Third-Party Suppliers accept no liability in connection with its use.