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IBOR transition

Interbank Offered Rates (IBORs) play a central role in financial markets and act as reference rates to hundreds of trillions of dollars in notional amount of derivatives and trillions of dollars in bonds, loans, securitisations, and deposits. These interest rate benchmarks, including the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA), and certain other IBORs, are currently being reformed.

Background of the IBOR transition

Uncovering of cases of attempted market manipulation and false reporting of IBORs in 2012, together with the post 2007-2008 financial crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of existing IBORs.

As a consequence, the UK Financial Conduct Authority (FCA), which is responsible for monitoring the LIBOR reference rate, announced on 27 July 2017 that panel banks will no longer be required to provide inputs for the calculation of LIBOR from 2022 onwards.

Impact for the financial industry

IBORs are referenced in a large volume of financial contracts and valuation/pricing systems. In terms of users, the population is also huge and diverse, covering banks, corporates, insurers, asset managers as well as private clients. As the FCA will not require the panel banks to continue to submit post 2021, the transition from IBORs to Alternative Reference Rates (ARR) will affect all financial institutions and have tremendous material effects on commercial, procedural and technical aspects. Working groups were set up for each impacted currency to develop ARRs and steer the transition.

Determination of Alternative Reference Rates

In Switzerland, the National Working Group for Reference Interest Rates in Swiss Francs (NAG or NWG), under the lead of the Swiss National Bank (SNB), is the central body that prepares reform proposals to replace LIBOR. With the introduction of the Swiss Average Rate Overnight (SARON) before the 2017 FCA announcement, the NWG had already set a decisive milestone for the replacement of the CHF-LIBOR.

Other working groups, each responsible for one of the LIBOR currencies, have been evaluating different ARRs to replace LIBOR. These ARRs are usually provided by official bodies such as central banks or stock exchanges and therefore leave little room for manipulation. ARRs are overnight interest rates which incorporate little or no credit risk. Besides, the markets underlying the ARRs are significantly more active than the markets underpinning the IBORs. Hence, while IBORs rely significantly on expert judgement, ARRs are purely transaction-​based.

The following table summarises the current situation for determining the alternative interest rate in the five currencies concerned.

Currency Rate Administrator Working Groups Alternative Reference Rate (ARR) ARR description Date of publication
CHF SIX Swiss Exchange National Working Group on CHF Reference Rates (NWG) Swiss Average Rate Overnight (SARON)  
  • Secured (overnight repo rate)
  • Fully transaction-based
 
December 2017
USD Federal Reserve Bank of New York Alternative Reference Rates Committee (ARRC) Secured Overnight Financing Rate (SOFR)  
  • Secured (covers the entire repo market)
  • Fully transaction-based
  • Solid underlying market
 
April 2018
GBP Bank of England Working Group on Sterling Risk-Free Reference Rates Reformed Sterling Overnight Index Average (SONIA)  
  • Unsecured and overnight
  • Fully transaction-based
  • Solid underlying market
 
April 2018
JPY Bank of Japan Study Group on Risk-Free Reference Rates Tokyo Overnight Average Rate (TONAR)  
  • Unsecured and overnight
  • Weighted by transaction volume
 
December 2016
EUR ECB (European Central Bank), FSMA (Financial Services and Markets Authority), ESMA (European Securities and Markets Authority) and EU Commission Working Group on Risk-Free Reference Rates for the Euro Area Euro Short-Term Rate (ESTER)  
  • Unsecured and overnight
  • Refllects the financing costs of banks in the euro area
 
October 2019

Involvement of Julius Baer in the IBOR transition

Julius Baer participates in the National Working Group for Reference Interest Rates in CHF together with the SNB and other industry representatives, as well as a working group on the euro rates reform (ACI MMLWG). A dedicated project team is responsible for the IBOR replacement.

Impact for Julius Baer clients

We encourage our clients to monitor the latest developments and consider how these changes may impact them and their financial products.

Preparation may include: 

  • understanding the differences between IBORs and ARRs;
  • reviewing their exposures to IBORs and how existing transactions may be impacted if the relevant IBOR is replaced or ceases to exist;
  • considering whether guidance or support from professional advisers is required.

Julius Baer is assessing how the IBOR transition may impact our contracts and products while at the same time enhancing our product offering. Julius Baer offering as a whole is not being impacted until further notice. However, Julius Baer continues to monitor regulatory and industry developments to consider what alternatives can be presented to our clients and counterparties. We may contact our clients in due course as the transition progresses if an impact on our business relationship materializes.