IBOR (Interbank Offered Rate) transition: Status update

21.12.2021

Following Announcement A21024, Clearstream Banking1, on behalf of ICSDs (Clearstream Banking S.A. and Euroclear Bank SA/NV), would like to provide customers with a status update on the Interbank Offered Rate (IBOR) transition, especially focusing on the London Interbank Offered Rate (LIBOR). 

New FCA announcements 

In 2021, the UK Financial Conduct Authority (FCA) has made several important announcements please refer to the attached document about the LIBOR transition. 

Timing for LIBOR transition 

The cessation of LIBOR will take place in phases:

  • The following LIBORs will cease to be published immediately after Friday, 31 December 2021:
    • All seven settings of Swiss franc (CHF) LIBOR.
    • All seven settings of Euro (EUR) LIBOR.
    • The overnight, 1-week, 2-month and 12-month Sterling (GBP) LIBOR.
    • The Spot Next, 1-week, 2-month and 12-month Japanese yen (JPY) LIBOR.
    • 1-week and 2-month U.S. dollar (USD) LIBOR.
  • 1-month, 3-month and 6-month GBP LIBOR will:
    • Be published on a synthetic basis at least until the end of 2022 (to be reviewed annually).
    • No longer be representative immediately after Friday, 31 December 2021.
  • 1-month, 3-month and 6-month JPY LIBOR will:
    • Be published on a synthetic basis until the end of 2022. 
    • No longer be representative immediately after Friday, 31 December 2021.
    • Cease to be published immediately after Friday, 30 December 2022.
  • Overnight and 12-month USD LIBOR will cease to be published immediately after Friday, 30 June 2023.
  • 1-month, 3-month and 6-month USD LIBOR will no longer be representative immediately after Friday, 30 June 2023.

Note: It is currently unknown whether it will be published on a synthetic basis.

Issuers should actively transition the existing securities impacted by the LIBOR cessation in a timely manner, in line with the guidelines by the relevant regulators.

New issuances 

Regulators have been encouraging issuers to: 

  • use the risk-free rates for new issuances;
  • complete the transition away from LIBOR well before the ultimate cessation of LIBOR on a representative basis. 

Issuers should ensure that they are aware of the latest regulatory expectations and avoid the use of LIBOR for new issuances. 
For example, 
The FCA has confirmed:

The U.S. regulators released a Joint Statement on Managing the LIBOR Transition

Issuers should check the statements from their own regulators, not limited to the above mentioned examples, as applicable.

Note: The reference rate name is not an eligibility criterion for the ICSDs. In other words, it is the responsibility of the issuer and its legal counsel to comply with the prohibition on the new use of LIBOR. The same applies to any other IBORs that are expected to cease.

Current status of the migration of existing securities referencing LIBOR

Volume of corporate actions 

When the ICSDs published the joint recommendation paper on 25 February 2021, the ICSDs’ biggest concern was the potential high volumes of the corporate actions to change the reference rate of the existing securities referencing LIBOR that would need to be handled within a short timeframe before the end of 2021. 

The ICSDs have observed that the volumes of corporate actions have been increasing since September 2021.

However, not all transitions have taken place yet. Issuers should continue to actively transition the existing securities referencing LIBOR beyond 2021. When the issuers decide to act may depend on various factors, including:

  • The first rate fixing date/payment date that is impacted (for example, currently a fixed rate note and the interest rate type changes to a floater five years later).
  • How the fallback provision in the Terms and Conditions of the security (T&C), if any, interact with the discontinuation of LIBOR: 
    • Whether there is a pre-cessation trigger that is defined (that is, either the unrepresentativeness or the announcement of it by the relevant jurisdiction) which allows the issuer to unilaterally change the T&C without solicitation of holder’s consent. 
    • How it is defined (for example, condition on the timing of the announcement of the unrepresentativeness).

This means that: 

  • Some issuers may be ready to trigger the change based on the FCA announcement dated 5 March 2021.
  • Some issuers may need to wait until the relevant LIBOR becomes unrepresentative. 
  • Some issuers may need to wait until the actual cessation of the relevant LIBOR.

Currencies

In terms of currency, most corporate actions are for GBP and JPY, but there are also some corporate actions for CHF, EUR and USD taking place.

Corporate actions used for the LIBOR transition

As mentioned in:

Section 3/Annex 3 of the joint recommendation paper and point 5 of the Frequently Asked Questions (FAQ), the following corporate actions types are taking place:

  • A change in the Terms and Conditions of the security related to the benchmark rate (CHAN).
  • A consent event to modify the benchmark rate or fallback provision that is defined in the Terms and Conditions of the security (CONS).
    Important: The ICSDs would like to highlight that, for a smooth migration of existing securities, it is essential that customers send their instructions for consent solicitations in a timely manner. More details can be found in section 3.2.5 of the joint recommendation paper.
  • A meeting event to solicit the consent to modify the benchmark rate or fallback provision that is defined in the Terms and Conditions of the security (BMET).

Point 4 of the FAQ, the issuers may also execute the call option (early redemption).

Information on transition plan per ISIN 

If the issuer wishes to share and discuss the transition plan with the noteholders, customers may receive some events to prepare for the transition, such as disclosure events (DSCL), informative events (INFO) and other events (OTHR). If such events are available, customers may act accordingly to obtain information.

If no corporate actions are available, it is difficult to obtain information related to the transition plan before it is finalised by the issuer, their legal counsel and, if appointed, their Independent Advisor (Benchmark Agent). The ICSDs will not respond any inquiries from the noteholders to check the transition plan of the issuer, unless it is either a specific proposal or a discrepancy that is raised by the sole holder of the security (for example, the underlying investor says that they signed the written resolution and the Terms and Conditions of the security has been changed,  however, there is no notification from the ICSD).

The ICSD’s aim is to notify customers as soon as they receive the official notification from the issuer’s agent or the Common Depository/Common Service Provider.

Status update on other IBORs: EONIA

The European Money Market Institute (EMMI) will cease to publish the Euro Overnight Index Average (EONIA) rate as of Monday, 3 January 2022. Euro short-term rate (€STR) is the alternative reference rate for EONIA.

Further information

For further information, please contact Clearstream Banking Client Services or your Relationship Officer.

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1. Clearstream Banking refers collectively to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248, and Clearstream Banking AG, registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500.