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Global Benchmark Reform

Addressing changes coming to benchmark rates including LIBOR

Summary

You may be hearing about changes to benchmark reference rates, such as the London Interbank Offered Rate (LIBOR), prior to December 2021. Reference rates are utilized broadly in the construction of many financial products, including loans, floating rate notes, derivatives and securitizations. As benchmark reform is ongoing and expected to continue over the next couple of years, Bank of America is working with global regulators, industry working groups, and trade associations on a transition from current benchmarks to alternative reference rates.

Background

In July 2017, the Financial Conduct Authority (FCA), a regulatory body in the United Kingdom, announced that it will no longer require banks to submit rates for the London Interbank Offered Rate (LIBOR) after 2021.

On December 4, 2020 ICE Benchmark Administration Limited (IBA), the administrator of LIBOR, released a consultation on its intention to cease the publication of one week and two month USD LIBOR settings and all GBP, EUR, CHF, and JPY LIBOR settings on December 31, 2021, and the remaining USD LIBOR settings (overnight, one month, three month, six month, 12 month) on June 30, 2023. The consultation closed on January 25, 2021.

Subsequently IBA notified the FCA, the regulatory supervisor for IBA, of its intention to cease publication of all LIBOR settings, subject to any rights of the FCA to compel IBA to continue publication.

The FCA then announced on March 5, 2021 the following:

  • IBA’s publication of the following 26 LIBOR settings will cease immediately following the publication of that LIBOR setting on the dates set forth in the table below.
LIBOR Currency LIBOR Tenors Final Publication Date
EUR, CHF All tenors December 31, 2021
GBP Overnight, 1 week, 2 month, and 12 month December 31, 2021
JPY Spot Next, 1 week, 2 month, and 12 month December 31, 2021
USD 1 week, 2 month 31 December 2021
USD Overnight and 12 month June 30, 2023
  • The following 9 LIBOR settings will become non-representative immediately following the “Final Date of Representativeness” set forth in the table below. The FCA will consult on requiring IBA to continue publishing the below GBP and JPY LIBOR settings and consider the case for continued publication of USD LIBOR settings, all on a synthetic basis for a period of time thereafter.* 
LIBOR Currency LIBOR Tenors Final Date of Representativeness Potential for Non-Representative, Synthetic Publication
GBP 1 month, 3 month, and 6 month December 31, 2021 January 1, 2022 onward
JPY 1 month, 3 month, and 6 month December 31, 2021 January 1, 2022 through December 31, 2022
USD 1 month, 3 month, and 6 month June 30, 2023 July 1, 2023 onward

*While the FCA has made clear that the above LIBOR settings will become non-representative as of the dates indicated above, there is no certainty that these LIBOR settings will continue to be published on a synthetic basis after such dates. 

Bank of America continues its enterprise-wide initiative to identify, assess and monitor risks associated with the potential discontinuation or unavailability of benchmarks, including LIBOR, and the transition to alternative reference rates. We are also evaluating existing contracts across all products to determine the impact of a discontinuation of LIBOR or other benchmarks and to address potential changes to those contracts.

Bank of America is actively working with global regulators, industry working groups and trade associations to develop strategies for an effective transition to new benchmarks. For example, Bank of America launched capabilities to support issuance and trading in products indexed to the new Secured Overnight Financing Rate (SOFR), which is the alternative benchmark rate to U.S. dollar LIBOR recommended by the Alternative Reference Rates Committee (ARRC). The ARRC is a group of private-market participants and official-sector entities convened by the Federal Reserve Board and the Federal Reserve Bank of New York. SOFR is a broad measure of the cost of borrowing U.S. dollars overnight collateralized by U.S. Treasury securities.

We will work closely with our clients on the transition, taking into consideration client concerns. For further guidance on how to prepare for the possibility that LIBOR or other benchmark rates will be discontinued or materially change, please consult with your legal, tax, financial and other professional advisors.

LIBOR Transition Overview

What is LIBOR?

For many years, the London Interbank Offered Rate (LIBOR) has been one of the most widely used interest rate benchmarks in the world.

Launched in 1969, LIBOR was first used in the syndicated loan market as a way to spread the risk of a loan across multiple lenders, using a periodic reset in the rate based on the banks’ funding costs plus a spread for credit risk. Over the last 50 years, LIBOR has become the most widely used interest-rate benchmark in the world. As of April 2019, approximately $370TN of financial contracts referenced LIBOR-based rates across various currencies globally, including USD, EUR, GBP and JPY. The bulk of these are OTC derivatives, but LIBOR is referenced across a broad range of financial products that includes loans, adjustable rate mortgages (ARMs), securitizations and floating rate notes (FRNs).

cross-product_IBOR

The ICE Benchmark Administration (IBA), as the benchmark administrator for LIBOR, calculates and publishes daily LIBOR rates for five currencies (CHF, EUR, GBP, JPY and USD) and seven tenors. These rates are intended to indicate the average rates at which banks could obtain wholesale, unsecured funding and are calculated based on contributions from panels of banks, one panel for each currency. For USD LIBOR, the panel of banks includes Bank of America, N.A.’s London branch, among other major banks.

Why is LIBOR being discontinued?

Since the 2008 financial crisis, the robustness of LIBOR as a benchmark of banks funding costs has been called into question, leading to the creation of alternative reference rates (ARRs) in several of the major currencies to enable a transition away from LIBOR. The UK’s Financial Conduct Authority (FCA), which has supervisory oversight over the administration of LIBOR, announced in July 2017 that it will no longer compel LIBOR panel banks to submit rates for LIBOR after 2021.

Now, the market has greater clarity on the end of LIBOR as a result of the official FCA announcement on LIBOR cessation and non-representativeness. This announcement requires market participants to address the end of LIBOR and consider the possibility that certain other rates or indices, which are used as interest rate benchmarks, may discontinue.

What is the impact of the FCA LIBOR cessation and non-representativeness announcement?

With respect to contracts or products that reference LIBOR, the FCA announcement may impact such contracts or products, including with respect to the fixing of certain spread adjustments and the date on which the replacement rate under such contract or product may become effective.

For derivatives and other relevant products and for all 35 LIBOR settings, (i) the FCA announcement constitutes an “Index Cessation Event” for the purposes of and as defined in each of the Attachment to the ISDA 2020 IBOR Fallbacks Protocol and Supplement 70 to the 2006 ISDA Definitions; and (ii) the date of the announcement constitutes a “Spread Adjustment Fixing Date” under the Bloomberg IBOR Fallback Rate Adjustment Rule Book.

For the avoidance of doubt, each relevant LIBOR-linked contract and product may transition to a replacement rate (e.g. based on Secured Overnight Financing Rate [SOFR] or Sterling Overnight Interbank Average Rate [SONIA]) in accordance with the terms and fallback provisions (if any) contained therein and publication of the announcement does not automatically transition such contracts and products to the replacement rate as of the date of the announcement. Also, circumstances could change following the announcement that could impact the timing and other information described herein.

Lastly, with respect to the FCA’s plans to consult on synthetic LIBOR, the FCA’s ability to exercise its powers to require IBA to continue publication on a synthetic basis is subject to the UK Parliament passing the proposed FCA powers under the Financial Services Bill. Also, the FCA makes clear that the use of synthetic LIBOR is intended to assist legacy contract holders.

What is LIBOR transitioning to?

The following chart provides ARRs or risk-free rates (RFRs) that various working groups have identified and recommended across five major jurisdictions as alternatives to LIBOR.

5 major jurisdictions – parallel but not harmonized paths to risk-free rates

  USA
USA flag
UK
UK flag
Europe
Europe flag
Switzerland
Switzerland flag
Japan
Japan flag
Alternative Reference Rate Secured Overnight Financing Rate (SOFR) Sterling Overnight Interbank Average Rate (SONIA) Euro Short-Term Rate (€STR) Swiss Average Overnight Rate (SARON) Tokyo Overnight Average Rate (TONAR)
Replacement For USD LIBOR GBP LIBOR EURIBOR, Euro LIBOR CHF LIBOR JPY LIBOR, JPY TIBOR, EUROYENTIBOR
Working Group Alternative Reference Rate Committee (ARRC) Working Group on Sterling Risk-Free Rates Working Group on Risk-Free Rates for Euro Area National Working Group on Swiss Franc Reference Rates Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
Administrator Federal Reserve Bank of New York Bank of England European Central Bank SIX Swiss Exchange Bank of Japan
Secured Yes No No Yes No
Changes are also occurring in Australia, Canada, Hong Kong and Singapore.

5 major jurisdictions – parallel but not harmonized paths to risk-free rates

  USA
USA flag
Alternative Reference Rate Secured Overnight Financing Rate (SOFR)
Replacement For USD LIBOR
Working Group Alternative Reference Rate Committee (ARRC)
Administrator Federal Reserve Bank of New York
Secured Yes
Date for LIBOR Cessation* June 30, 2023*
  UK
UK flag
Alternative Reference Rate Sterling Overnight Interbank Average Rate (SONIA)
Replacement For GDP LIBOR
Working Group Working Group on Sterling Risk-Free Rates
Administrator Bank of England
Secured No
Date for LIBOR Cessation* Dec. 31, 2021*
  Europe
Europe flag
Alternative Reference Rate Euro Short-Term Rate(€STR)
Replacement For EURIBOR, Euro LIBOR
Working Group Working Group on Risk-Free Rates for Euro Area
Administrator European Central Bank
Secured No
Date for LIBOR Cessation* Dec. 31, 2021*
  Switzerland
Switzerland flag
Alternative Reference Rate Swiss Average Overnight Rate(SARON)
Replacement For CHF LIBOR
Working Group National Working Group on Swiss Franc Reference Rates
Administrator SIX Swiss Exchange
Secured Yes
Date for LIBOR Cessation* Dec. 31, 2021*
  Japan
Japan flag
Alternative Reference Rate Tokyo Overnight Average Rate (TONAR)
Replacement For JPY LIBOR, JPY TIBOR, EUROYENTIBOR
Working Group Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks
Administrator Bank of Japan
Secured No
Date for LIBOR Cessation* Dec. 31, 2021*
Changes are also occurring in Australia, Canada, Hong Kong and Singapore.

At present, LIBOR and ARRs are not equivalent rates, as they utilize different underlying transactions and methodologies in their construction.

What is the Transition Timeline?

With the announcement of LIBOR cessation and non-representativeness having occurred on March 5, 2021, the market now has a clearer timeline on end of LIBOR across the five LIBOR currencies. 

Global Benchmark Reform

Key Watch Dates for Global Benchmark Reform

LIBOR transition time lines for the U.S., U.K, and E.U. from January, 2020 through January, 2022.

a. * Best practices published by the ARRC and the Sterling RFR recommend cessation of origination of new LIBOR products prior to year end 2021.
b. January 2020: Amendments to IFRS 9, IAS 39 and IFRS 7 are effective for annual periods
c. October 2020: ISDA amended 2006 Definition for OTC IBOR-reference IR derivatives to incorporate ARR-reference fallbacks and issued a protocol for amending legacy IBOR-reference trades

How does the transition impact our clients?

For financial products referencing LIBOR, the impact could vary across different types of products, and even between transactions in the same type of product. Additionally, LIBOR currencies and tenors will be discontinuing on differing schedules. 

It is important that clients review and understand the governing terms of their financial products. Clients should prepare for the cessation of LIBOR and the possibility that other benchmark rates may be discontinued or materially change.

Some financial products that may be impacted by benchmark reform include:

  • Loans
  • Mortgages
  • OTC Derivatives
  • Exchange-Traded Derivatives
  • Securitizations
  • Floating Rate Notes (FRNs)

This list is indicative and not fully exhaustive. Other financial products may also be affected indirectly due to changes in discounting curves or pricing.

For guidance on how to prepare for the cessation of LIBOR and the possibility that other benchmark rates will be discontinued or materially change, please consult with your legal, tax, financial and other professional advisors.

How is Bank of America assisting its clients?

Bank of America is working closely with our clients to promote awareness of these changes, take into consideration client concerns, support markets, and provide solutions to our clients. Bank of America is participating in the work of global regulators, industry working groups and trade associations aimed at supporting a smooth transition away from current benchmarks to ARRs or other replacement rate(s).

Other Resources

More information can be found in Bank of America’s most recent Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission. Additional information on the potential impact of the transition to ARRs on your investments and transactions can be found in Bank of America’s IBOR Transition Statement. Below are additional resources on benchmark reform and the IBOR transition:

Central Banks & Working Groups:
US: Federal Reserve Bank of New York (FRBNY)
       U.S. Alternative Reference Rates Committee (ARRC)
UK: Bank of England
       Working Group on Sterling Risk Free Rates
EU: European Central Bank (ECB)
        Working Group on Euro Risk Free Rates
SWITZERLAND: Swiss National Bank
          National Working Group on Swiss Franc Reference Rates
JAPAN: Bank of Japan (BOJ)
        Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

Industry Bodies:
International Swaps and Derivatives Association (ISDA)
International Capital Market Association (ICMA)
UK Finance
Loan Market Association (LMA)
Loan Syndications and Trading Association (LSTA)
Asia Pacific Loan Market Association (APLMA)
Treasury Markets Association (TMA)
Japanese Bankers Association (JBA)

Official Sector:
Financial Stability Board (FSB)
International Organization of Securities Commissions (IOSCO)
Financial Industry Regulatory Authority (FINRA)
U.S. Commodity Futures and Trading Commission (CFTC)
U.S. Securities and Exchange Commission (SEC)
U.K. Financial Conduct Authority (FCA)
Hong Kong Monetary Authority (HKMA)
Monetary Authority of Singapore (MAS)

The above resource links are not affiliated with Bank of America or Merrill or any of their affiliates and are provided for information and educational purposes only. Any opinions and/or views expressed do not necessarily reflect the opinions and/or views of Bank of America or Merrill or any of their affiliates.

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