Intertrust N : Are you ready for the IBOR changeovers?

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Long-established interest rate benchmarks such as LIBOR are being phased out. It's time to finalise any revisions you may need to make, say Steffan Galesloot, our Head of Service Innovation in the Netherlands, and Diederick Slotboom, Business Manager, Capital Markets in the Netherlands.

New benchmark interest rates go live at the end of 2021. A huge range of financial instruments including loans, bonds, derivatives, cash pooling and factoring will be affected.

Transitional arrangements have been designed to make the changeover smooth. For instance, the methodologies behind old benchmarks have been synchronised with the newly robust and secure index measures.

Even so, financial market participants are well-advised to check on paperwork. At the least, action may avoid inconvenience. At worst, inaction could cause lengthy delays and complex disruption.

What is happening to IBORs?

Interbank Offered Rates (IBORs) are being replaced by Risk-Free Rates (RFRs) with a variety of benchmarks with acronyms including SOFR, ESTR, TONAR, SONIA and SONAR.

LIBOR - the London Interbank Offered Rate - has been probably the most widely used benchmark of its type. It has been calculated in currencies including US dollars, Japanese yen, UK sterling and Swiss francs.

The big changeover deadline comes at the start of January 2022.

What needs to be done to prepare for the IBOR transition?

Overnight interest rates reform will affect contracts in one of four ways.

1. Some older contracts maturing in 2022 and beyond may have to be rewritten. Urgent action is needed to replace old reference rates with new ones.
2. Other older contracts that end in 2022 or later may have pre-existing clauses that can be applied. Action is required to check the provisions and whether they need to be triggered.
3. Newer contracts that span the changeover date may have been drawn up with the transition in mind. Checks are needed to ensure the provisions are up-to-date and robust. Action may be required.
4. Long-established contracts referencing one of the old rates that mature before the end of 2021 will be unaffected. Other than checking, no action is required.

All agreements that might be affected by the IBOR transition must be analysed. Each document must be checked to see if there are pre-existing fallback provisions and whether they are up to the tasks presented by the changeover.

• Meetings, including board meetings, may have to be arranged. Any findings from analysis may need to be discussed and action plans created.
• Counterparties may have to be contacted. Decisions need to be made about which party will take the lead if paperwork needs to be reissued.
• If revisions are required, it may be necessary to appoint an external legal adviser to amend contracts and negotiate with counterparties and regulators.

Why is IBOR reform happening?

RFRs are taking over from IBORs because weaknesses in the existing calculation methodology came to light in the aftermath of the financial crisis of 2008/9.

As a recent article in the Financial Times expressed it: "LIBOR's reputation was irrevocably damaged a decade ago when bankers were found to have manipulated the key interest rate."

The main thrust of the reform has seen benchmarks calculated on real-time financial market transactions. Previously, the reference rates were derived from estimates given by individuals.

Will there be regional differences in the IBOR transition?

Yes. Although it is a worldwide programme of reform, and the changes are likely to affect most of the world's financial contracts, there will be local variations.

Different regulatory bodies are overseeing the transition and the operation of the reformed system. In the US, the Federal Reserve Bank of New York has a key role.

In Europe, the benchmark transition is governed by the EU Benchmark Regulation (BMR). The BMR aims to enhance the reliability and robustness of benchmarks, sets out general rules on how benchmark administrators must conduct their activities and provides requirements about input data and the calculation methodologies of benchmarks.

What happens if nothing is done?

If no action is taken and no fallback provisions are in place, change may be automatic and disruption may ensue.

The Secured Overnight Financing Rate (SOFR) is the RFR replacing USD LIBOR. The transition is split, however. Forward rates for one week and two months will cease at the end of 2021. The USD LIBOR overnight, 1-month, 3-month, 6-month and 12-month will cease on 30 June, 2023.

A reformed EURIBOR will exist after 2021 but the Euro Overnight Interest Average (EONIA) will become the Euro Short Term Rate (ESTR).

JPY LIBOR will become the Tokyo Overnight Average Rate (TONAR). GBP LIBOR will become the Sterling Overnight Index Average (SONIA).

How can Intertrust Group help?

Wherever you are based, Intertrust Group has an office with the local expertise required to manage the changeover. With the majority of clients, we have already done the work.

We do the analysis, assess the priorities and manage the sign-off processes.

Why Intertrust Group?

• We are a publicly listed company with more than 65 years' experience in providing world-class trust and corporate services to clients around the world.
• Our 4,000 professionals work together across 30 jurisdictions to offer global reach, deep local knowledge and an extensive international network so clients can achieve their strategic goals.
• We provide a wide range of financial and administrative services to clients operating and investing in the international business environment.
• We help companies to expand globally, offering support with restructuring, outsourcing and further developments.