Public DeclarationsLIBOR Transition

LIBOR stands for London Inter-Bank Offered Rate which is the benchmark interest rate at which banks lend to and borrow from one another in the interbank market. Essentially, it is the rate for unsecured short-term borrowing in the interbank market. It is administered by the Intercontinental Exchange (ICE), which calculates the rates on the basis of submissions by panel banks using available transaction data and their expert judgment. It is published daily across five currencies including the US dollar, the Euro, the British pound, the Japanese yen, and the Swiss franc, with seven different maturities namely overnight, 1 week, 1 month, 2 months, 3 months, 6 months and 12 months. It is used as a key interest rate benchmark across a number of derivatives, bonds, loans, securitizations, deposits and other products.

The use of LIBOR was called into question following the global financial crisis. Regulatory reviews identified that shifts in the way banks fund their operations meant LIBORwas increasingly calculated based on panel bank judgments as to their borrowing costs, rather than actual transaction data.

Global regulators desire that interest rate benchmarks be founded upon actual transactions, not expert judgment, in order to be robust and reliable. In 2017, the UK Financial Conduct Authority announced that the underlying markets upon which LIBOR is derived were insufficiently active to offer a sustainable interest rate benchmark. It announced it had secured undertakings from panel banks to make LIBOR submission until the end of 2021 but would not expect to compel them to make submissions beyond that date.

While regulators have allowed publication of synthetic USD LIBOR for select tenors beyond 2021, regulators have consistently guided financial markets that they should not assume the availability of LIBOR after the end of 2021 and must transition both new products and existing contracts to alternative benchmark rates.

In relation to USD LIBOR, ICE Benchmark Administration, as administrator of LIBOR,announced on November 30, 2020 that it intends to consult on a proposal to continue publishing overnight, one, three, six and 12 month USD LIBOR until June 30, 2023 (with one week and two month settings ceasing publication following December 31, 2021). Concurrently, certain US regulatory agencies (the US Regulators) released a statement encouraging banks to cease entering into new contracts that use USD LIBOR after the end of 2021.

The Reserve Bank of India (RBI) has released a Roadmap for LIBOR transition which inter-alia requires banks / financial institutions to frame a Board-approved plan, outlining an assessment of exposures linked to LIBOR and the steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of ARRs. RBI has also encouraged banks / financial institutions to cease, and also encourage their customers to cease, entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted ARR, as soon as practicable and in any case by December 31, 2021. The RBI Notification may be accessed using the following link (https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12128&Mode=0).

The transition process is driven by a combination of global regulators, trade associations and financial institutions. Various industry groups and working groups exist in different markets to identify their preferred alternative benchmark rate and facilitate the process of transitioning their markets onto them. A key characteristic of each recommended alternative rate is that it is based on actual transaction data from deep and liquid markets, with the intention of making it more sustainable and robust than current LIBOR rates.

The table below shows the recommended Alternative ReferenceRates (ARRs) which are nearly Risk-Free Rates (RFRs) for each of the LIBOR currencies:

In preparation for the transition away from LIBOR, various authorities, industry bodies and trade associations have identified certain RFRs as possible replacements for LIBOR and/or are considering how existing benchmark rates might be reformed. RFRs are overnight rates, which traditionally are backward-looking, i.e. are published after the period to which they relate. RFRs are considered to be more robust and representative than LIBOR because transactions in the underlying market inform the determined rate to a greater extent than is currently the case for LIBOR.

RFRs are calculated on a different basis and are not like-for-like replacements for LIBOR. LIBOR is set at or prior to the commencement of the period to which they relate, allowing certainty during such a period over amounts which will be due at the end of that period. A non-exhaustive list of the differences between LIBOR and RFRs is mentioned below:

• LIBOR is a term rate benchmark across multiple tenors (O/N, 1W, 1M, 2M, 3M, 6M, 12M), whereas RFRs are overnight rates with no term element;
• LIBOR is a forward-looking rate, whereas RFRs are backward-looking rates;
• LIBOR contains a premium for bank credit and term liquidity risk. In contrast, while the precise nature of each RFR may vary, in general the RFRs contain little or no such additional premiums because they are overnight and sometimes secured; and
• For each LIBOR currency, the replacement RFR would have both distinct characteristics and a distinct RFR administrator, whereas LIBOR is administered by a single administrator for all currencies, according to a single set of characteristics.

Fallbacks are contractual provisions that specify trigger events for a transition from referenced LIBOR rate to a replacement rate along with spread adjustments.

RFRs are based on overnight transactions and are therefore overnight rates as opposed to LIBOR which is published in multiple tenors. The overnight RFRs are risk-free or nearly risk-free whilst LIBOR reflect bank credit risk premium and other factors such as liquidity and supply and demand fluctuations. Consequently, adjustments need to be made to the relevant RFR to be used as fallbacks to LIBOR.

A “term adjustment” will account for the move from a term rate to an overnight rate and this will likely involve compounding the RFR on a daily basis to arrive at an “adjusted RFR”. For derivatives, the International Swaps and Derivatives Association (ISDA) has determined that the compounded setting in arrears rate will apply. Such a methodology will result in an adjusted RFR that is known at the end of the relevant interest period, rather than at the start of the interest period.

A “spread adjustment” will then be applied to the relevant adjusted RFR to account for the rate differential between the relevant LIBOR and the adjusted RFR. For derivative products, ISDA has determined that upon a permanent cessation of LIBOR, the spread adjustment will be based on the historical median spread between the relevant IBOR and the adjusted RFR calculated over a five-year lookback period. For cash products, both the Alternative Reference Rates Committee (ARRC) and the Sterling Risk Free Rate Working Group (RFRWG) have also recommended the use of a similar five-year median spread adjustment methodology.

Clients with LIBOR exposures due to mature beyond 2021 (or June 2023, for certain USD LIBOR settings) are exposed to the risk of the permanent cessation of LIBOR. Upon the cessation of LIBOR, clients with LIBOR exposures could find their contracts and hedges no longer operate as intended. Furthermore, delaying the transition could lead to increased exposure to liquidity risk if market volumes are reduced, impacting contract repricing.

Clients should consider the transition of any contracts referencing LIBOR to the relevant RFR or an alternative rate as agreed between parties. This could be achieved by way of active conversion or including appropriate fallback language or otherwise in the relevant contracts. We have initiated and will continue to engage in discussions with our clients in this regard to determine appropriate next steps.

We also encourage our clients to perform an assessment of their LIBOR-related exposures and take steps to understand the risks and impact associated with LIBOR transition on their contracts and respective businesses, including any accounting, tax and operational implications. In this regard, clients may want to consider engaging independent consultants for advice.

India Exim Bank is aware that the discontinuation of LIBOR may impact both its new and existing products and services and that the impact on all parties, including clients, will need to be carefully considered. The Bank is a member of various industry and regulatory groups and is actively monitoring developments in this regard. India Exim Bank will continue to provide more information on the changes as they become known at industry level.

India Exim Bank has conducted a detailed review covering how LIBOR is used in its products or services. The Bank is monitoring this situation and, where appropriate, will provide clients with further information.

India Exim Bank will continue to inform clients on the changes, notably when there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.

We will periodically update this page and provide communications relating to the changes. In the meantime, if you require any further information, please contact your Relationship Manager. India Exim Bank may also provide you with product or service specific information which you should consider carefully.