Reference form and phasing out of LIBOR in 2021
LIBOR is being phased out and replaced by new risk-free reference rates
It has been decided that LIBOR should be phased out as the reference rate in the market and replaced by new risk-free reference rates (RFR). LIBOR is used for a number of products at DNB, including deposits, margin-based loans in currency, derivatives and Trade Finance.
From January 2022, LIBOR will no longer be published for the Swiss franc (CHF), British pound (GBP), Japanese yen (JPY) and euro (only LIBOR EUR), as well as 1 week and 2 month rates for the US dollar (USD). For the dollar, publication of the remaining LIBOR rates will end at the end of June 2023.
The authorities in the countries with these currencies have provided recommendations on how the new reference rate for the currency should be set and adjusted.
The new reference rates that will replace LIBOR are:
Sterling Overnight Index Average (SONIA)
Secured Overnight Financing Rate (SOFR)
Euro Short-term Rate (€STR)
Swiss Average Rate Overnight (SARON)
Tokyo Overnight Average Rate (TONAR)
Bank of England
Federal Reserve Bank of New York
European Central Bank
SIX Swiss Exchange
Bank of Japan
Interbank Offered Rates (IBORs), and especially the London Interbank Offered Rate (LIBOR) have been in use for more than 40 years. LIBOR is set by a panel consisting of a number of major international banks and reflects future expectations.
In 2012, some of these banks were convicted of having manipulated the LIBOR rate. The scandal was the catalyst for developing a new alternative based on moving overnight rates, which are almost risk-free.
In 2014, the Financial Stability Board (FSB) recommended using risk-free reference rates to replace IBORs and on 5 March 2021, final dates were established for the phasing out of LIBOR.
Final dates for the phasing out of LIBOR
When will new reference rates be introduced?
DNB already uses the new reference rates for new agreements for deposits, margin-based loans, derivatives, factoring and Trade Finance products for the currencies being phased out at the end of the year. It will still be possible to enter into agreements in LIBOR USD until the end of the year.
For customers with agreements in LIBOR that continue throughout 2021, we will update existing agreements to reflect the new reference rates before the end of 2021.
Important differences between LIBOR and RFR:
Established by a set of panel banks based on the rate at which they expect to lend to other banks.
The rate is known at the beginning of the interest period for which it will be used.
Includes an instalment surcharge.
Includes expectation of future interest rate levels.
Includes the bank’s credit risk.
Based on the average interest rate that financial institutions pay to borrow overnight.
The rate is known at the end of the interest period.
No instalment surcharge.
No credit surcharge between the banks.
DNB’s guidelines for the LIBOR transition
DNB will try to follow market standards and recommendations from relevant workgroups and lending market organisations such as the LMA and the LSTA.
Agreements entered into with LIBOR as the reference rate must specify how the transition to RFR will be implemented when LIBOR is no longer published.
For multi-currency agreements, DNB will usually use the same calculation method for all currencies with RFR.
DNB will use a Credit Adjustment Spread to transfer existing loans and derivatives to new reference rates.
For linked products (e.g. loan agreements with interest rate hedging) we prefer, where possible, to set up agreements on equivalent terms to minimise risk for our customers.
Our customers should be aware that even if risk-free reference rates are now used as replacement rates for IBOR, they cannot be considered direct replacements.