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Preparing for the reference rate change

22/06/2021
Preparing for the reference rate change

Summary

After the Financial Crisis, InterBank Offered Rates (IBORs) have been declared unreliable by Regulators and new Alternative Reference Rates transactions-based have been developed to substitute these indices. Consequently, most of the IBORs will cease to be published from December 2021. As IBORs are used in a broad range of financial products and contracts, market participants need to be prepared and work on a plan to move away from them.

Key takeaways
  • Most of InterBank Offered Rates (IBORs) are going be discontinued from December 2021
  • New Alternative Reference Rates (ARR) have been identified and developed to substitute IBORs
  • Regulators are publishing guidelines to encourage and support the private market participant in the change.

What are IBORs?

IBORs stands for InterBank Offered Rates and includes indices as Euro OverNight Index Average (EONIA), EURO InterBank Offered Rate (EURIBOR) and London Interbank Offered Rate (LIBOR). These indices have set the benchmark rate for lending on an unsecured basis, underpinning the worldwide trade in financial products – from bonds and loans to derivatives and mortgage-backed securities.

Why are IBORs not reliable anymore?

In 2012, some banks have been accused of fraudulent activities and data manipulation during the financial crisis. As consequence, the integrity of IBORs was questioned by Regulators and National authorities who express the need of rates based on actual transactions and not anymore on bank quotes. In 2017 the UK Financial Conduct Authority (FCA) announced that LIBOR rate would have been discontinued at the end of 2021. Other IBORs will cease to be published from that date (i.e. EONIA) whereas others have been reformed (i.e. EURIBOR) and will continue to exist even after.

What is going to happen?

Several working groups at national and international levels have been established to work on the definition of Alternative Reference Rates (ARR) for the relevant currencies and to develop best practice and roadmap on the transition for market players.

Currency

IBOR Reference Rate

Alternative Reference Rate

USD

USD LIBOR

SOFR (Secured Overnight Financing Rate)

EUR

EURIBOR

EURIBOR (reformed)

EUR

EONIA

€STR (Euro Short Term Rate)

CHF

CHF LIBOR

SARON (Swiss Average Rate Overnight)

GBP

GBP LIBOR

SONIA (Sterling Over Night Index Average)

JPY

JPY LIBOR & TIBOR (JPY)

TONA (Tokyo Overnight Average Rate)

HKG

HIBOR

HIBOR (reformed) / HONIA (Hong Kong Dollar Overnight Index Average)

 

The transition away from IBORs to the ARR is impacting globally market participants and financial institutions. Precisely, Legal renegotiation are required for existing contracts as well as repapering and repricing, fallback provision should be included in all the agreements, operational developments are needed to ensure ability to process ARR instruments and a proper client onboarding and communication should be implemented.

How Allianz Global Investors is preparing the transition?

Allianz Global Investors started working on the IBOR discontinuation already beginning of 2019 to assess the impact, to identify the risks, to develop mitigation actions and to ensure a smooth transition from IBOR to the new Alternatives Reference Rates (ARR). In addition, Allianz Global Investors is closely tracking developments, consultations, and publications from all global Working Groups, including their best practice guidelines.

 

 

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The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.

This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP (Australian Registered Body Number 160 464 200) is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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