IBOR Transition Overview
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What are IBORs?
Interbank Offered Rates (IBORs) are the average rates at which banks can borrow in the interbank market and range in maturities from overnight to 12 months. The rates are calculated using submissions from a number of panel banks. IBORs are widely used as reference rates by market participants across nearly all asset classes, including: derivatives, bonds, loans, and other financial instruments.
The London Interbank Offered Rate (LIBOR) is the most commonly used IBOR. It is an unsecured interbank borrowing rate that relies on the panel banks to accurately report the interest rates that they would have to pay to borrow from each other. LIBOR is based on five currencies (US Dollar, European Euro, British Pound Sterling, Japanese Yen, and Swiss Franc) and seven different maturities (overnight/spot next, one week, and one, two, three, six, and twelve months). The combination of the five currencies and seven maturities creates a total of 35 different LIBOR settings that are calculated and reported each business day. The official LIBOR interest rates are published at 11:55 a.m. London time by the ICE Benchmark Administration (IBA).
The Canadian Dollar Offered Rate (CDOR) is the recognized financial benchmark in Canada for bankers’ acceptances (BAs). It is the rate at which banks are willing to lend to companies. CDOR is determined daily from a survey of bid-side rates provided by six principal market-makers, including the major Canadian banks. Refinitiv Benchmark Services (UK) Limited (RBSL) is the official administrator and calculator of CDOR. Prior to 10:15 ET, submitting banks provide RBSL with the rate that they are willing to lend to corporate borrowers with existing BA facilities that reference CDOR for one, two, and three month terms (six and 12 month terms have already been discontinued).
There is an important distinction between LIBOR and CDOR. While CDOR is a committed lending rate, LIBOR is a borrowing rate. CDOR is the rate at which contributors are willing to extend credit to corporate clients utilizing a BA facility. In contrast, LIBOR is intended to reflect the rate at which a contributor believes it can borrow from other financial institutions.
A global interest rate benchmark reform effort has been undertaken to improve the durability, robustness, and sustainability of the most widely used IBORs; encouraging the industry to move from bank credit rates to alternative risk-free rates (RFRs).
Due to changes in the regulatory framework, there has been a significant decline in the interbank unsecured funding markets in the last decade. Stringent liquidity rules since the 2008 financial crisis have made it far less attractive for banks to lend to other banks through short-term unsecured markets. Regulators have indicated a desire to move away from LIBOR and move towards RFRs because LIBOR no longer fits its purpose.
In December 2021, the Canadian Alternative Reference Rate working group (CARR) determined that there are certain aspects of CDOR’s architecture that pose risks to its future robustness. CARR has stated that the BA lending model, which supports CDOR, is no longer seen as an effective way for banks to provide credit to their corporate clients. Key global interest-rate benchmarks are increasingly being restructured to be primarily based on large volumes of underlying transactions rather than expert judgement. Because the determination of CDOR is based predominantly on expert judgement, it is not consistent with evolving global best-practices.
Publication of 24 LIBOR settings has now ended (all euro and Swiss franc; overnight, 1-week, 2-month, and 12-month sterling and Japanese yen; 1-week and 2-month USD dollar). Publication of the Euro Overnight Index Average (EONIA) benchmark was also discontinued on January 3, 2022. The remaining five USD dollar LIBOR settings (overnight, 1-, 3-, 6-, and 12-month) will continue to be calculated using panel bank submissions until end-June 2023.
On May 16, 2022 RBSL announced the cessation of the publication of CDOR after June 28, 2024. This decision has been authorized by the Ontario Securities Commission (OSC) and Autorité des marchés financiers (AMF). In its December White Paper, CARR outlined a two-staged transition timeline with derivatives and securities transitioning to the Canadian Overnight Repo Rate Average (CORRA) by the end of June 2023, and an extra year for loan products to transition before CDOR ceases to be published.
IBORs in other jurisdictions – BBSW (Australia), Euribor (Europe), HIBOR (Hong Kong), TIBOR (Japan), and Fed Funds (US) – are expected to continue post 2021.
As of April 1, 2022, six of the most widely used sterling and Japanese yen settings (1, 3 and 6 month settings) will be published using a new methodology that does not rely on submissions from panel banks. These settings are generally referred to as “synthetic” LIBOR, and the Financial Conduct Authority (FCA) is allowing the use of these synthetic rates only in legacy contracts (except cleared derivatives); the use of synthetic LIBOR is banned in new contracts. Synthetic Japanese yen will cease at the end of 2022, and synthetic sterling is not guaranteed to continue past end-2022. Synthetic LIBOR Cessation
Most contract documents that reference LIBOR or CDOR contemplate a temporary cessation of a benchmark rate and not a permanent cessation. Therefore, an amendment of the embedded IBOR fallback language in those documents is needed. In the case of derivatives, the International Swaps and Derivatives Association (ISDA) has published the IBOR Fallbacks Supplement (“Supplement”) which will amend the standard definitions for interest rate derivatives to include robust fallbacks. As of January 25, 2021, all new derivatives that reference the definitions will now include fallbacks. For legacy derivatives, parties will either need to amend their existing Master Agreements or adhere to ISDA’s 2020 IBOR Fallbacks Protocol (“Protocol”) which will incorporate fallbacks into legacy derivatives with other counterparties that choose to adhere to the Protocol. Loan documents are typically not standardized and thus each loan agreement will need to be negotiated and amended by the parties. However, the ARRC has developed standard loan fallback language that can be leveraged to address the USD LIBOR transition. It is expected that the CARR will also support development of standard loan fallback language to address the CDOR transition in the near future.
CIBC has mobilized a comprehensive Enterprise-wide IBOR Transition Program which addresses every aspect of the benchmark reform globally. The key work streams that run through all business units and infrastructure groups have been identified and are focused on areas such as communication, operational readiness, and product strategy and transition management.
The discontinuance of LIBOR and CDOR may affect products and services that you have previously purchased or entered into and it is not yet clear how alternative reference rates will apply to any such products and services. You should consult with your own financial and legal advisors on the possible effects of IBOR reform. CIBC will continue to monitor the market and communicate updates taking place during the transition away from LIBOR/ CDOR.
Alternative Rates Across the Globe
What are the IBOR alternative replacement rates?
Regulators around the world have tasked committees comprised of market participants to identify and recommend a successor rate in each country. These successor rates are outlined below.
|Country||IBOR||Cessation Date||Alternative rate||Target Date to cease use of IBOR|
|USA||USD LIBOR||Dec 31, 2021
(USD LIBOR settings on 1W and 2M)
June 30, 2023
(remaining USD LIBOR settings)
(Secured Overnight Financing Rate)
|Dec 31, 2021
(exception: new derivatives to hedge loans entered into before Dec 31, 2021)
|UK||GBP LIBOR||Dec 31, 2021||SONIA
(Sterling Overnight Interbank Average Rate)
|March 31, 2021|
|Europe||EUR LIBOR||Dec 31, 2021||€STR
(Euro Short Term Rate)
|Dec 31, 2021|
|Europe||EONIA||Dec 31, 2021||Dec 31, 2021||Dec 31, 2021|
|Switzerland||CHF LIBOR||Dec 31, 2021||SARON
(Swiss Average Rate Overnight)
|Dec 31, 2021|
|Japan||JPY LIBOR||Dec 31, 2021||TONA
(Tokyo Overnight Average Rate)
|Dec 31, 2021|
|Canada||CDOR||June 28, 2024||CORRA
(Canadian Overnight Repo Rate Average)
June 28, 2024
(no new derivatives/ securities allowed after June 30, 2023; new derivatives that hedge or reduce CDOR exposures of derivatives or securities transacted before June 30, 2023 or in loan agreements transacted through until June 28, 2024 allowed.)
Key differences between IBORs and RFRs
|Transaction based?||No – bank submission based on expert judgement (Unsecured)||Yes – Repo Transactions (Secured)||Yes – Money Markets (Unsecured)||Yes – Money Markets (Unsecured)||Yes – Repo Transactions (Secured)||Yes – Money Markets (Unsecured)||Yes – Repo Transactions (Secured)|
|Term Structure||Yes – multiple maturity tenors (Forward-looking)||Yes – Overnight rate (Backward-looking). Term SOFR (Forward-looking)||No – Overnight rate (Backward-looking)||No – Overnight rate (Backward-looking)||No – Overnight rate (Backward-looking)||No – Overnight rate (Backward-looking)||No – Overnight rate (Backward-looking). Term CORRA may be available at a later date|
|Includes credit risk?||Yes – Bank lending rate (includes credit risk)||RFR (no credit risk)||RFR (minimal/no credit risk)||RFR (minimal/no credit risk)||RFR (no credit risk)||RFR (minimal/no credit risk)||RFR (no credit risk)|
Impact of IBOR Transition
There are inherent structural differences between IBORs and RFRs. Adjustments are needed to the RFRs to ensure that contracts which reference an IBOR continue to meet the parties’ original objectives as much as possible once a fallback takes effect. While the economics of RFR transactions will be similar to those under the existing IBOR product, it is impossible to say on any particular day that they will be identical.
As a risk-free (or near risk free) rate, RFRs will be lower than IBORs. This necessitates a spread adjustment to compensate for the lack of credit and term risk in RFRs and help to economically neutralize the transition from IBORs as much as possible.
Regulators have confirmed the “historical median approach” as the recommended fallback spread adjustment methodology for lending and derivatives products. It is based on the median spot spread between the LIBOR and the adjusted RFR calculated over a five-year lookback period prior to the relevant cessation announcement. The fallback rate will equal the term-adjusted RFR plus the spread adjustment. The industry has developed and finalized this fixed spread adjustment as of March 5, 2021 for LIBORs and as of May 16, 2022 for CDOR. These spreads are available through Bloomberg Index Services Limited (“Bloomberg”) for derivatives and Refinitiv for loans.
Unlike existing IBORs, which have a term component for setting interest rates one, three, six or 12 months out, most of the new RFRs are backward-looking; therefore, systems, models and curves are required to calculate compounded interest in arrears. Clients may not know the interest rate in advance of payment; however, the development of a term SOFR rate has helped to mitigate this challenge to some extent. In Canada, there is a public consultation underway to gauge the need for a forward-looking term CORRA. Market participants are encouraged to provide feedback to this survey by June 13, 2022.
Transition activities may have an adverse impact on the effectiveness of derivatives trades that are used as cashflow hedges. If the timing of the fallback trigger in each product differs, this could result in the derivative no longer being an effective hedge for the underlying loan.
ARRC recommends the adoption of hardwired fallback language in lending product contracts (loans, bonds, securitizations) as it offers certainty over the replacement rate and spread and likely eliminates the need to amend the loan at the time of the LIBOR transition. In September 2020, the Loan Market Association (LMA) published an exposure draft of a multicurrency term and revolving facility agreement with a mechanism to switch from LIBOR to compounded RFRs at a specified date during the term of the facility. In Canada, the CARR has established a sub-working group to develop appropriate fallback language for loan agreements.
CIBC recommends that you review the details of the ARRC and LMA fallback language to fully understand the impact on your business from a commercial, legal and operational standpoint. We also recommend (in the case of hedged loans) that you review and amend both the loan and swap contracts at the same time to avoid potential basis mismatches. CIBC will contact you in due course to review our mutual contracts and update them to meet industry best practices.
The relevant industry bodies – ISDA, ARRC, the Financial Stability Board (FSB), as well as various central banks, tax authorities and accounting boards strongly encourage widespread and early adherence to the Protocol by all affected financial and non-financial firms. CIBC recommends that you review the details of the Protocol with your professional advisors and take the course of action that best suits your requirements. For clients that elect to not adhere to the Protocol, the parties will need to negotiate a bilateral amendment to their agreement prior to the cessation date.
In the UK, the recommendation is to use a compounded in arrears with a five-day lookback methodology. However, in the US, there are a number of conventions and the market has not yet settled on any one standard. The ARRC recommends a waterfall mechanism, which allows the counterparties to use any of the following conventions: a) Term SOFR, b) Simple Average SOFR in arrears, c) Compounded in Arrears SOFR, or that b) or c) be used if Term SOFR is not yet available. In Canada, the CARR has recommended the use of compounding in arrears convention for derivatives and securities, but the convention for lending products is still not finalized.
Key Developments and Milestones
In the UK, the IBA and Refinitiv each launched their respective Term SONIA benchmarks. Both benchmarks are available in 1-month, 3-month, 6-month and 12-month tenors. However, regulators recommend that the use of SONIA Term Rate be limited to select products (i.e., trade finance which require a term rate from a pricing perspective) and client types (i.e., smaller corporate, wealth and retail clients for whom simplicity and/or payment certainty is a key factor).
In the US, the ARRC has recommended CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) Term rates that can be used in commercial contracts.
In Canada, CARR has set up a cash conventions working group to review the need and development of term CORRA.
ISDA has published its 2020 IBOR Fallbacks Protocol and a related Supplement to the 2006 ISDA Definitions. The Supplement became effective on January 25, 2021 and amends the 2006 Definitions to provide a IBOR fallback mechanism for new derivatives transactions that incorporate the 2006 Definitions. The Protocol provides a uniform market-wide mechanism for parties to voluntarily amend existing derivatives contracts to address LIBOR discontinuation. CIBC adhered to the Protocol on October 21, 2020.
- ISDA Fallback Protocols & Supplement
- Signup for the Protocol
- Derivatives Product Transition Guidance
(ISDA has provided details on how fallbacks would function for various derivatives products.)
Since the formal endorsement of CME’s Term SOFR rate, there has been increased activity in SOFR lending. Given the industry cannot issue new USD LIBOR contracts from Jan 1, 2022, it is expected that all lending in USD will shift to SOFR. Liquidity in CORRA is thin at the moment, but expected to increase with initiatives such as CORRA first that will be led by the CARR over the next one year.
Supporting Your IBOR Transition
CIBC is actively engaging with industry bodies and market participants to support a smooth transition away from LIBOR. Internally, CIBC has put into place a comprehensive IBOR Transition Program that covers all aspects of the transition, including client communication, contract digitization & remediation, operational readiness, product transition strategy, risk management and financial controls.
CIBC recommends that you review your firm’s IBOR exposures, as well as contracts with IBOR reference, and work with your independent financial and legal advisors to ensure you are ready for the transition event. You should also ensure your systems, models and processes are updated to handle the alternative RFRs. Finally, as there is still some uncertainty around the transition, as highlighted above, we recommend that you continue to closely monitor market developments. CIBC will make every effort to inform you of any significant market developments.
If you have any questions, please contact us at:
Bank USA Questions?
For Bank USA questions related to the LIBOR transition, please contact us at:
The following links contain additional information about the transition:
- Alternative Reference Rate Committee (ARRC)
- The Working Group on Sterling Risk-Free Reference Rates
- Working group on euro risk-free rates
- Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
- National Working Group on Swiss Franc Reference Rates
- Canadian Alternative Reference Rate working group (CARR)
- International Swaps and Derivatives Association, Inc. (ISDA)
- Chicago Mercantile Exchange (CME)
- Financial Conduct Authority (FCA)
- ICE Benchmark Administration (IBA)
- Autorité des marchés financiers
- Refinitiv Benchmark Services (UK) Limited