IBOR Transition Overview

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).

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. ​​​​​

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.

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 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.)