Transition from LIBOR
LIBOR, a key interest rate benchmark used in financial contracts globally, is set to be discontinued after December 31, 2021. Regulators and industry committees comprised of market participants have identified and recommended alternative risk free rates (RFRs). Please review our website LIBOR Transition at CIBC for a list of these replacement rates across various currencies.
Impact to clients
The LIBOR transition will impact certain products, such as loans and derivatives, where the reference interest rate is tied to the LIBOR benchmark. Transitioning to one of the alternative RFRs is not simply a matter of replacing the old rate with a new one as the new rates are calculated differently than LIBOR. Further details on the structural differences between LIBOR and the recommended alternative RFRs can be found on our website LIBOR Transition at CIBC. The extent of the impact will depend on a number of factors that are still evolving; however, potential impacts include: changes to cash flows, valuations, hedge accounting relationships, contracts and systems. We encourage you to stay up-to-date on market developments, assess your contracts for LIBOR exposure, and seek guidance from your professional advisors on the potential implications of these changes. CIBC will work with you to transition your impacted products to alternative rates once there is more clarity on industry standards and conventions.
Key market and industry developments
Derivatives
The International Swaps and Derivatives Association Inc. (ISDA) has published its 2020 IBOR Fallbacks Protocol and a related Supplement to the 2006 ISDA Definitions. The Supplement amends the 2006 Definitions to provide a LIBOR 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.
Where can you find the Protocol?
It can be found on this link: ISDA Fallback Protocols & Supplement.
How to sign up for the Protocol?
For parties that are “ISDA Primary Members,” the cost will be $500. For all other parties, adherence will be free if done prior to January 25, 2021 (the Protocol effective date). Link for adherence: ISDA Fallback Protocol.
Industry stance
The relevant industry bodies — ISDA, The Alternative Reference Rate Committee (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’s decision
After reviewing the details of the Protocol with our internal financial and legal advisors, we have decided to adhere to the Protocol and have submitted our decision to ISDA.
Action recommended
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.
Lending products
ARRC has published an updated version of its recommended fallback language for USD LIBOR-denominated syndicated and bilateral business loans. The ARRC also released a document recommending best practices for completing the transition from LIBOR.
Where can you find these documents?
Alternative Reference Rate Committee Announcements.
What is the key recommendation?
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.
Spread adjustment
The ARRC recommended methodology is based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. This is the same approach used by ISDA for derivative products.
Impact on hedging
Transition activities may have an adverse impact on the effectiveness of derivative trades that are used to hedge cashflows of loans. If the timing of the activation of the fallback rate in either product differs, this could result in the derivative no longer being an effective hedge for the underlying loan.
Action recommended
CIBC recommends that you review the details of ARRC’s fallback language to fully understand the implications 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.
Other relevant developments
USD LIBOR cessation
The ICE Benchmark Administration (IBA), the administrator of LIBOR, has announced it will consult on its intention to cease the publication of the one week and two month USD LIBOR settings post December 31, 2021, and the remaining USD LIBOR settings post June 30, 2023. IBA USD LIBOR Announcement.
SOFR compounding index
NY Fed has started to publish 30-, 90-, 180-day SOFR averages as well as SOFR Index. SOFR Averages.
SONIA loan conventions
Bank of England (BoE) Risk Free Rate Working Group released a recommendation on standard market conventions for GBP loans based on compounded in arrears SONIA. BoE Sterling RFR Working Group.
SONIA compounding index
BoE will start to publish 30-, 90-, 180-day SONIA averages as well as a SONIA Index. SONIA Averages.
Spread adjustment methodology
ISDA and ARRC have confirmed the fallback spread adjustment methodology for lending and derivative products. It will be the “historical median approach” based on the median spot spread between the LIBOR and the adjusted RFR calculated over a five-year lookback period prior to the relevant announcement. The fallback rate will equal the term-adjusted RFR plus the spread adjustment. Bloomberg Index Services Limited (BISL) has been selected to calculate and publish the fallback rates on a delayed basis. Bloomberg Fallback Rates.
Accounting guidance
International Accounting Standards Board (IASB) expected to update the International Financial Reporting Standards (IFRS) to deal with accounting issues arising from the replacement of LIBOR, including hedge accounting issues. International Accounting Standards Body (IASB) LIBOR Transition Guidance.
Tax guidance
U.S. Internal Revenue Service (IRS) has provided interim guidance on transitioning away from LIBOR to RFR. Internal Revenue Service (IRS) LIBOR Transition Guidance; HM Revenue & Customs LIBOR Transition Guidance.
CCP discounting switch
LCH/ CME completed the switch of discounting from Fed Funds to SOFR CCP Discounting Switch.
Key external targets
BoE is encouraging market participants to cease new issuances of products linked to GBP LIBOR after April 1, 2021. Similarly, ARRC is recommending that market participants cease new issuances of products linked to USD LIBOR after July 1, 2021. Bank of England Transition Milestones; ARRC Recommended Transition Milestones.
Supporting the LIBOR transition
CIBC is actively engaging with industry bodies and market participants to support a smooth transition away from LIBOR. We have mobilized a comprehensive, enterprise-wide LIBOR 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, exposure and contract data review, product strategy and transition management.
We have launched a dedicated website where you can find more information. The website can be accessed at LIBOR Transition at CIBC.
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If you have any questions, please get in touch with your CIBC relationship manager or contact us at [email protected]. For Bank USA questions related to the LIBOR transition, please contact us at [email protected].