Updated on 08.07.2021
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 use 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.
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.
Banks may trade in MIFOR after December 31, 2021 only for certain specific purposes such as transactions executed to support risk management activities such as hedging, required participation in central counterparty procedures (including transactions for hedging the consequent MIFOR exposure), market-making in support of client activities or novation of MIFOR transactions in respect of transactions executed on or before December 31, 2021.
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 end by 31st December 2021. In August 2020, RBI issued letters to all commercial banks sensitizing them about the need to be prepared for the LIBOR cessation. Again in November 2020, RBI Governor Shaktikanta Das said that Indian Banks’ Association (IBA) has been working with market participants to facilitate the transition. Large Indian banks including SBI and ICICI banks have already testing the waters with dollar transactions on the secured overnight financing rate (SOFR), joining global peers in preparing for the transition from the LIBOR. Both SBI and ICICI Bank have executed interbank money market deals through their Hong Kong branches with SOFR, launched by the New York Federal Reserve. SOFR is based on transactions in the US Treasury Repo market and is being widely used as a substitute for LIBOR in dollar-denominated loans and derivatives across the world.
Why did regulators decide to decommission LIBOR?
”LIBOR”, once labeled as the world’s most important benchmark was discredited because of the 2008 financial crisis when authorities in the United States and Britain found traders had manipulated it to make a profit that sparked an investigation by Britain’s Financial Services Authority (FSA). The LIBOR rigging scandal of 2008 dragged major banks into trouble and made them
What is the alternate?
It is reported that the British bus operator National Express had become the first company to take out a loan from NatWest Bank based on Sonia benchmark replacing LIBOR benchmark and thousands of firms from Britain and
The substituting of Libor with another reference rate does not appear to be easy as the financial regulators worldwide are scared of a situation where any mishandling in operation can cause credit market confusion which may trigger plentiful of
Originally posted :October 11, 2019