IBOR Reform

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September 2021 – This is considered one of the greatest changes to financial markets since the euro was introduced almost 20 years ago. Find out here what the reform is all about, how Hamburg Commercial Bank is preparing for this great change, and what this means specifically for bank clients.

Background

At the end of this year, we will say goodbye to familiar names such as USD-LIBOR and other what are known as IBOR reference interest rates. IBOR is the abbreviation for interbank offered rates – the interest rates that banks use to lend money to each other on the interbank market. They also serve as reference values for a wide variety of financial products that are tied to interest rates – from variable loans and bonds to mortgages to interest-rate derivatives.

IBOR tenors range from overnight to twelve months. These reference interest rates also exist in many different currencies. The very important role that IBORs still play can be seen by looking at the market volume of all the securities that involve IBORs. It amounts to around 400 trillion US dollars. The largest portion by far is represented by the reference rates USD-LIBOR. Other reference interest rates that are currently important are the British GBP-LIBOR, the Swiss CHF-LIBOR, the European EONIA and the Japanese JPY-LIBOR.

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IBORs have been subject to intense scrutiny - a lack of transparency in calculating IBORs has made them susceptible to manipulation and undermined trust in the interbank market.

The reform of the IBORs was initiated by the G20 because of this lack of transparency and the LIBOR scandal in 2011. The G20 consists of multiple parallel initiatives from supranational committees (G20, FSB), central banks and representatives of the banking sector. The goal of the reform is to develop and establish transparent, resilient reference interest rates to ensure that market actors can trust the reference interest rates. The end of the IBORs in the European Union was incorporated into law by the EU Benchmarks Regulation (EU-BMR) that has been in force since 2018. They are to be replaced by risk-free reference interest rates (RFRs).

The IBOR reform is bringing fundamental changes for markets and market participants as well as for Hamburg Commercial Bank, its market partners and its clients.

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IBOR timeline

Changes to interest-rate calculation methods

The fundamental difference between the current IBORs and the new RFRs is that IBORs are forward rates. They are determined for various durations by panel banks based on expert estimations regarding the future interest rate performance of the interbank market.

However, the new RFRs are daily interest rates. They are determined based on real overnight transactions. This is why interest payments will no longer be fixed at the beginning, but will be fixed retrospectively at the end of an interest period. New calculation methods have been developed to be able to use RFRs for interest periods longer than one day as well.

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What will be changing with risk-free rates?

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IBOR transition

Comprehensive adjustments to the underlying infrastructure are necessary to change financial products that are tied to interest rates over to RFRs. This includes adjusting processes, methods and models to account for the different methodology of RFRs. It is also important to change existing IBOR-based contracts to RFRs.

Information for HCOB clients

Client Information

IBORs are being successively replaced by risk-free reference interest rates (RFRs) a decade after the LIBOR scandal and after years of intensive preparation.

The most important RFRs worldwide – SOFR, SONIA, €STR, SARON and TONA – are now available. The EURIBOR has also been reformed according to the requirements of the EU-BMR. Regardless of this, some portfolios of financial products that are tied to interest rates are still being quoted using the old IBORs. At the same time, IBOR-based transactions are still being made. The financial markets are currently in a transition phase where both the old IBORs and the new RFRs are being traded. Nevertheless, quotations of IBORs are being successively discontinued. GBP-/CHF-/JPY-/EUR-LIBORs will be discontinued as of the end of 2021. In the meanwhile, an extended period until the end of June 2023 applies to the main durations of O/N USD-LIBORs – 1-month, 3-month, 6-month and 12-month durations.

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IBOR Reform

Client Information on IBOR reform

IBOR working group at HCOB is very well prepared

Hamburg Commercial Bank is well-positioned to enable a smooth transition for its clients. The IBOR experts at HCOB are actively involved in interbank IBOR working groups on changing to the new RFRs and is keeping an eye on relevant market developments. This enables us to efficiently deal with the challenges of transition and to flexibly react to current developments.

In compliance with recommendations from IBOR working groups, HCOB will gradually transition from LIBORs to RFRs for its existing portfolio – presumably by the end of 2020 for non-US dollar products and by the end of June 2023 for US dollar products. Any required contractual changes will be closely coordinated with the affected clients.

FAQ

What are IBORs?

IBORs (interbank offered rates) are the average interest rates that banks use to loan money to each other. The durations of the underlying loans range from overnight to up to twelve months. IBORs function as reference interest rates for financial products such as derivatives, variable loans or bonds that are tied to interest rates. They are very important to financial markets. Worldwide, IBOR-based financial products have a value of around 400 trillion US dollars. IBORs are available in various currencies. The most important IBORs are USD-LIBOR, EURIBOR, GBP-LIBOR, CHF-LIBOR, EUR-LIBOR, EONIA and TIBOR/JPY-LIBOR.

What is the IBOR reform?

The IBOR reform refers to changing reference rates from IBORs to risk-free rates (RFR) or alternative reference rates (ARR).

What is the status of the IBOR reform?

We are in a transition phase where both the old IBORs and the new RFRs are being traded. The most important RFRs worldwide (SOFR, SONIA, €STR, SARON and TONA) have been introduced. The EURIBOR has also been reformed according to the requirements of the EU-BMR. At the same time, portfolios of financial products tied to interest rates are being partially quoted using the old IBORs. There is also some new business that is based on old IBORs. Nevertheless, quotations of IBORs are being successively discontinued. By the middle of 2023, we expect to have discontinued quoting any IBORs. This is why IBOR working groups are recommending changing new and existing business to RFRs in a timely manner.

What will happen with the EURIBOR?

The EURIBOR was reformed, and its new calculation methodology is partially based on real transactions. It meets the requirements of the EU-BMR and can be used. It has not been clarified yet whether the EURIBOR will remain permanently.

Contact:

Hamburg Commercial Bank will keep you up-to-date about the further development of the IBOR reform.

If you have any questions, feel free to contact us anytime at benchmark-reform@hcob-bank.com .

More information:

You can also find detailed information about the IBOR reform on the websites of the national IBOR working groups and industry organizations: