The Reserve Bank of India (RBI) today issued an advisory to banks and other RBI-regulated entities, underlining the need to take steps to ensure a complete transition away from the London Interbank Offered Rate (LIBOR) from July 01, 2023.
The key messages in the advisory include:
Banks should ensure no new transactions are linked to LIBOR which is being phased out globally by July 1, 2023, or the local equivalent – the Mumbai Interbank Forward Outright Rate (MIFOR)*.
*The term Mumbai Interbank Forward Offer Rate (MIFOR) refers to a benchmark rate used by commercial banks for certain financial contracts in India. MIFOR is used for setting prices on forward-rate agreements and derivatives. The Financial Benchmarks India Pvt. Ltd. (FBIL) will cease to publish MIFOR after June 30, 2023.
Banks/FIs are advised to take all necessary steps to ensure the insertion of fallbacks at the earliest in all remaining legacy financial contracts that reference US$ LIBOR (including transactions that reference MIFOR).
“Banks/FIs are expected to have developed the systems and processes to manage the complete transition away from LIBOR,” said the regulator. The Reserve Bank will continue to monitor the efforts of banks/FIs for ensuring a smooth transition from LIBOR, it said.
While certain US dollar LIBOR settings will continue to be published till June 30, 2023, the extension of the timeline for cessation is primarily aimed at ensuring roll-off of USD LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR. It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), and contracted on or before December 31, 2021.
Background:
London Inter-Bank Offered Rate ‘LIBOR’ which has been a price reference for financial contracts worth more than $300 trillion worldwide, covering various types of bank finance including complex derivatives home loans and credit cards, etc. is set to be decommissioned by the end of 2021. With this, a 50-year-old benchmark denominated in sterling, Yen, Swiss Franc, Dollar, and Euro ends by 31st December 2021.
Read: WHY DID REGULATORS DECIDE TO DECOMMISSION LIBOR?
On Thursday, July 08, 2021, the Reserve Bank of India (RBI) issued an advisory to banks and other RBI-regulated entities emphasizing the need for preparedness for the transition away from London Interbank Offered Rate (LIBOR). The key steps to be taken in this regard include the use of any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021. Banks are also encouraged to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), published by the Financial Benchmarks India Pvt Ltd (FBIL), which references the LIBOR as soon as practicable and in any event by December 31, 2021.
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