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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, has announced on 27 July 2017 and confirmed on 5 March 2021 that panel banks will no longer be required to provide inputs for the calculation of LIBOR after 31 December 2021 and 30 June 2023 respectively. All euro, sterling, Swiss franc and yen LIBOR settings will each cease to exist after 31 December 2021. One-week and two-month US dollar LIBOR will also cease at that time. The remaining US dollar tenors (overnight, one-month, three-month, six-month and twelve-month tenors) will cease after 30 June 2023.
Impact for the financial industry
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)|| ||December 2017|
|USD||Federal Reserve Bank of New York||Alternative Reference Rates Committee (ARRC)||Secured Overnight Financing Rate (SOFR)|| ||April 2018|
|GBP||Bank of England||Working Group on Sterling Risk-Free Reference Rates||Reformed Sterling Overnight Index Average (SONIA)|| ||April 2018|
|JPY||Bank of Japan||Study Group on Risk-Free Reference Rates||Tokyo Overnight Average Rate (TONAR)|| ||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)|| ||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. A dedicated project team is responsible for the IBOR replacement.
Impact for Julius Baer clients
Julius Baer has already successfully completed the impact assessment of the transition on its product and contract base. In the first half of 2021, Julius Baer has amended its product offering to replace the existing IBOR references and accommodate ARR instruments and products.
Since Q4 2020 Julius Baer has been contacting its clients impacted by the IBOR replacement to ensure a smooth transition to alternative reference rates.