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Some of the most important numbers used in global financial markets are changing.
For Macquarie, it’s important that our clients, counterparties, investors and other stakeholders understand what financial benchmark rate reform is and what it means for them, Macquarie and financial markets more broadly.
Financial benchmark rate reform impacts short-term interest rates commonly used across financial markets, also known as interbank offered rates (IBOR).
IBORs, including BBSW1, EURIBOR2, LIBOR3 and TIBOR4, are interest rate benchmarks that have been used in a wide variety of financial instruments for decades. LIBOR is the most widely used interest rate benchmark in financial markets, estimated to be referenced in over $US200 trillion of financial products, including bonds, derivatives and loans.
LIBOR is designed to reflect the price of interbank funding markets and is published daily across a variety of currencies and tenors (e.g. overnight, one-week, three-month, six-month), based on submissions by a panel of banks.
Over time, changes in interbank funding markets have meant that LIBOR panel bank submissions were based less on observable transactions, and more on expert judgment.
Financial markets regulatory authorities reviewed what these changes meant for financial stability, and in 2013 published recommendations to reform major interest rate benchmarks. These recommendations included best practice principles for financial benchmarks, measures to strengthen existing benchmarks and plans to develop alternative reference rates.
As a result of these recommendations, many IBORs around the world are undergoing reforms and some, including LIBOR, are being replaced with alternative reference rates. This page is primarily concerned with the replacement of LIBOR.
The replacement of LIBOR is a significant undertaking for financial markets participants. LIBOR is being phased out and replaced by Alternative Reference Rates (ARRs).5
The UK’s Financial Conduct Authority, the regulator of LIBOR, confirmed the cessation or loss of representativeness dates of all 35 LIBOR settings on 5 March 2021. All GBP, EUR, CHF, JPY, and some lesser used USD LIBOR tenors, will cease publication after 31 December 2021. The remaining USD LIBOR tenors will cease publication after 30 June 2023. Please see the FCA announcement on 5 March for further details on the cessation of each LIBOR setting.
ARRs have been identified for each of the five LIBOR currencies:
| LIBOR | ARR |
|---|---|
| CHF LIBOR | SARON - Swiss Average Rate Overnight |
| EUR LIBOR | €STR - Euro Short-Term Rate |
| GBP LIBOR | SONIA - Reformed Sterling Overnight Index Average |
| USD LIBOR | SOFR - Secured Overnight Financing Rate |
| YEN LIBOR | TONA - Tokyo Overnight Average Rate |
As we prepare for this change, regulators and financial markets participants around the world are taking action to ensure the adoption of ARRs take place with minimal disruption and risk to clients, counterparties, investors and other stakeholders.
While the publication of most tenors of LIBOR may cease at the end of 2021, it is important for clients, counterparties, investors and other stakeholders to develop an understanding of what the transition from LIBOR to an ARR means now.
As the industry considers how and when it will transfer to ARRs, it is important to note that the timing of changes may vary based on the currencies, products and participants involved. As a result, regulators and industry groups recommend that financial markets participants take measures to understand their exposures to LIBOR and prepare for its cessation.
Macquarie is preparing for the LIBOR transition and many of our clients, counterparties, investors and other stakeholders are doing so as well. If your firm has LIBOR exposures, it is important that you are now prioritising measures to prepare for LIBOR cessation.
As a client or counterparty of Macquarie, it is important that you are aware of what the change from LIBOR to an ARR might mean for you, including whether you require guidance or support from professional advisers.
Preparation may include, understanding:
Greater clarity on LIBOR transition is emerging as the financial services sector finalises its work on many aspects of the LIBOR transition and the functioning of new markets and products. National working groups, and key regulators, in each of the LIBOR currencies are leading efforts to resolve or provide clarity on the outstanding issues. Our stakeholders can follow industry developments by staying connected with Macquarie, and directly through the website links provided below.
Beyond LIBOR, you might also seek to understand the potential impacts and risks relating to other IBORs that may be subject to reform, including BBSW, EURIBOR and TIBOR.
As a diversified financial group, with a variety of global products and services, the transition from LIBOR to ARRs is an important change for us.
To ensure we are well prepared, we are conducting a detailed analysis of our use of LIBOR rates. This includes a review of LIBOR references within legal agreements, systems, models and processes. We are developing plans to manage the related impacts and risks of transition, including how we meet the needs of our clients as ARR usage increases and where direct engagement on existing transactions, agreements and arrangements might be required.
This page was last updated on 19 March 2021.