LIBOR Transition

Beyond LIBOR The world of interest rate benchmarks is changing. Here is what you need to know.

Overview

The London Interbank Offered Rate (LIBOR), the most important number in the financial markets, is set to be phased out by the end of 2021. Alternative reference rates (ARRs), also known as risk-free rates (RFRs), have been identified as a replacement – although creating alternatives for LIBOR is no easy task. LIBOR is linked to contracts worth trillions of US dollars. This is why we are actively involved in the industry transition with regulators, central banks and industry bodies. We want to ensure a smooth transition for our clients as well as for the resilience of financial markets.

ARRs are already in use in certain jurisdictions. They are linked to active underlying markets and are considered more robust than LIBOR. We support the transition to ARRs and are committed to helping our clients navigate through to a world beyond LIBOR.


Why is LIBOR being replaced

LIBOR was introduced in 1969, when one of the first syndicated loans of USD 80 million was pegged to LIBOR (Source: Reuters, August 2012). Over the decades, LIBOR and other Interbank Offered Rates (IBORs) served as an efficient and effective set of benchmark interest rates, reflecting the interest rate on unsecured interbank borrowings of designated panel banks. Globally, more than USD 400 trillion notional in derivatives, loans and other financial products are based on IBORs (Source: BIS Quarterly Review, March 2019). IBORs are also hardwired into many financial processes, including valuations and risk management.

Following the financial crisis, the numbers of transactions on the interbank market significantly decreased. This raised questions about the sustainability of the LIBOR framework.

Ultimately, in 2017, the UK's Financial Conduct Authority announced it would not compel panel banks to continue to provide LIBOR submissions beyond the end of 2021. Thereafter, discussions around the transition of LIBOR rapidly advanced and market participants started preparing for the transition to alternative methods, which aim to support a sound and resilient financial market.

What it means for our clients

The transition from LIBOR and some other IBORs is expected to impact existing and future transactions across contract types and client segments. This includes mortgages with private households, corporate loans and derivatives trading.

We are assessing how the transition may impact IBOR-linked transactions and products while preparing to enhance our product offering. Additionally, we are closely monitoring market developments and considering what options can be made available for you.

We will keep you informed of developments as the LIBOR transition progresses. In the meantime, we recommend that you stay engaged with the transition and consider the potential impact on your products.

Any questions? Contact your client advisor or sales representative. Additional information, specific to each UBS business division, is available here.

We expect the LIBOR panels to dwindle or disappear after end-2021 – firms must be able to run their business without LIBOR from this date, and reduce the stock of ‘legacy’ LIBOR contracts.

Andrew Bailey, Chief Executive of the Financial Conduct Authority, speech given at the Securities Industry and Financial Markets Association in July 2019


The risk-free rates differ economically to LIBOR, and also differ by currency. This adds complexity to an already very challenging transition for global financial markets.

Angus Graham, UBS LIBOR Migration Lead

Size of IBOR market in 5 major currencies

FAQ

We know there are a lot of questions on the LIBOR transition. We'll keep you updated as more information becomes available.

What is LIBOR?

  • The London Interbank Offered Rate (LIBOR) is widely used as a benchmark, reflecting the interest rate on unsecured interbank borrowings of designated panel banks.
  • How it works: Every day, a panel of contributing banks submit rates to the LIBOR administrator, ICE Benchmark Administration (IBA). They do so for five currencies (USD, EUR, GBP, CHF and JPY) and seven tenors (ON, 1W, 1M, 2M, 3M, 6M and 12M). IBA calculates LIBOR as an average from the interest rates submitted by the panel banks, based on what they would be charged if they were to borrow from other banks.
  • Over the last few decades, LIBOR and other Interbank Offered Rates (IBORs) served as an efficient and effective set of benchmark interest rates, widely used as a reference rate in contracts and for hedging. Globally, more than USD 400 trillion1 notional in derivatives, loans and other banking products are based on IBORs.

1Source: BIS Quarterly Review, March 2019

Why is a transition away from LIBOR being considered?

  • Since the financial crisis in 2007/2008, the daily volume of interbank transactions underlying the LIBOR fixing has collapsed.
  • IBA and the panel banks have made significant improvements to LIBOR. However, these improvements could not address the absence of an active underlying market.
  • Panel banks have become increasingly reluctant to continue making submissions to LIBOR because of the reduced level of underlying transactions.
  • The UK's Financial Conduct Authority (FCA) concluded that LIBOR was potentially unsustainable and announced in July 2017 that it would no longer compel panel banks to provide LIBOR submissions beyond the end of 2021.
  • In June 2019, the FCA reiterated that firms need to end their reliance on LIBOR by the end of 2021, across all currencies and tenors, and advised them to take these preparations seriously. The LIBOR benchmark is therefore at risk of a permanent cessation beyond that date.

When will the LIBOR transition take effect?

  • The FCA has stated that after 2021 it will no longer compel panel banks to submit rates used to calculate LIBOR. Firms should treat the LIBOR discontinuation as something that will happen and be prepared for that.
  • Regulators expect the transition to be market led, so have not set a date for the transition to take effect. We expect that the market for different LIBOR currencies may move to the new alternative reference rates at different times.

What impact will the transition have on IBOR-based products?

  • The transition from LIBOR and other IBORs is expected to impact both existing and future transactions, particularly in derivatives, bonds, structured products, securitized products, loans and mortgages but also in other products and contract types that reference IBORs.
  • We are also planning to enhance our product offering by launching new products that reference the new alternative reference rates.

What is the alternative to LIBOR?

Each of the major jurisdictions (the US, the UK, Switzerland, Japan and the eurozone) has identified alternative reference rates, also known as risk-free rates. Many other jurisdictions are considering alternatives. You will find information on the alternatives to LIBOR on the tab entitled "Alternative rates".

How will the transition affect your portfolio?

  • We are assessing how the transition may impact IBOR-linked transactions and products, while closely monitoring market developments. At this point, it is not yet possible to accurately assess the precise impact of the LIBOR transition. However, we will continue to inform you of upcoming changes.
  • In the meantime, we recommend that you stay engaged with the transition and consider the potential impact on your products.

What is UBS's position on the LIBOR transition and how are we involved?

  • An internationally recognized and sustainable benchmark solution is the cornerstone for an efficient financial market. Therefore, we support the market transition from LIBOR and other IBORs and are actively involved in industry discussions.
  • We are contributing to the industry dialogue with regulators, central banks and industry bodies, aiming to achieve continuity for benchmark-based products and, as a consequence, the resilience of the financial market.
  • We have set up a cross-divisional and cross-functional change program to assess and address the impact of the LIBOR transition on processes, systems, documentation and product offering, among others.

Alternative rates

 

A consensus has been reached among market participants on the overnight alternative reference rates (ARRs), also known as risk-free rates (RFRs). National working groups have been established across all major currencies to steer the transition to the new rates.

Key points:

  • The ARRs are structurally different to LIBOR and are not economic equivalents of LIBOR in the respective currencies.
  • Liquidity is developing in the new ARRs, although there is still a way to go.
  • There are several initiatives ongoing to provide term structures for the ARRs. Considered methods include compounding the overnight rates over a period, or deriving a term structure based on overnight index swaps and futures.

Alternative reference rates by jurisdiction

Jurisdiction

Jurisdiction

Working Group

Working Group

Alternative Rate

Alternative Rate

Secured vs. Unsecured

Secured vs. Unsecured

Overnight vs. Term

Overnight vs. Term

Rate Administration

Rate Administration

Available as of

Available as of

Jurisdiction

usflag U.S.

Working Group

Alternative Reference Rates Committee

Alternative Rate

Secured Overnight Financing Rate (SOFR)

Secured vs. Unsecured

Secured

Overnight vs. Term

Overnight

Rate Administration

Federal Reserve Bank of New York

Available as of

3 April 2018

Jurisdiction

ukflag U.K 

Working Group

Working group on Sterling Risk-Free Reference Rates

Alternative Rate

Reformed Sterling Overnight Index Average (SONIA)

Secured vs. Unsecured

Unsecured

Overnight vs. Term

Overnight

Rate Administration

Bank of England

Available as of

23 April 2018

Jurisdiction

switzerlandflag Switzerland

Working Group

The National Working Group on Swiss Franc Reference Rates

Alternative Rate

Swiss Average Rate Overnight (SARON)

Secured vs. Unsecured

Secured

Overnight vs. Term

Overnight

Rate Administration

SIX Swiss Exchange

Available as of

25 August 2009

Jurisdiction

japanflag Japan

Working Group

Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

Alternative Rate

Tokyo Overnight Average Rate (TONA)

Secured vs. Unsecured

Unsecured

Overnight vs. Term

Overnight

Rate Administration

Bank of Japan

Available as of

1 November 1997

Jurisdiction

europeanflag Euro Area

Working Group

Working Group on Euro Risk-Free Rates

Alternative Rate

Euro Short-Term Rate (€STR)

Secured vs. Unsecured

Unsecured

Overnight vs. Term

Overnight

Rate Administration

European Central Bank

Available as of

2 October 2019

Transition challenges

A number of benchmark transition challenges has been identified and raised by the International Swaps and Derivatives Association (ISDA)1 and are outlined below. These challenges are addressed through national working groups and industry forums, where UBS is actively engaged. This list is not exhaustive.

Risk-free rate (RFR) market adoption

Widespread and simultaneous market adoption required to enable orderly and controlled transition.

Legal

The transition should be considered in the context of the underlying legal documentation for any transaction.

Liquidity

Sufficient liquidity build-up required to facilitate the transition to the new RFRs, as well as the development of forward-looking term structures.

Regulatory

Existing regulatory requirements may present complications and or obstacles to transition.

Infrastructure

Significant operational and infrastructure updates, from trade capture through to settlement, including technology for compliance, risk modeling and portfolio tracking to incorporate new RFRs.

Governance and controls

Enhancement to the governance, controls and conduct risk procedures to enable transition and ensure compliance.

Valuation and risk management

Transition of legacy contracts could potentially result in less effective hedges and/or market valuation issues.

Accounting and tax

Fair value changes may impact taxation of firms. Also, hedge accounting and inter-affiliate accounting structures could be affected.

Market exposures

The scale of the challenge

IBOR rates underpin approximately USD 400 trillion worth of exposures across the globe. IBOR rates are widely used in pricing for a host of credit and derivative products and are embedded in financial processes, such as in valuations and accounting.

$400 trillion

in IBOR market exposures

5 currencies

and multiple tenors

Click on the interactive map for details on IBOR market exposures by product

map
EURIBOR
>$150-180 tn
EURO-LIBOR
>$2 tn
Syndicated loans
Business loans
Retail loans
Floating rate notes
Securitizations
OTC derivatives
Exchange-traded derivatives
Deposits
Low (<$100 bn)
Medium ($100 bn< x< $1 tn)
High (>$1 tn)
JPY-LIBOR
>$30 tn
TIBOR
>$5 tn
Syndicated loans
Business loans
Retail loans
Floating rate notes
Securitizations
OTC derivatives
Exchange-traded derivatives
Deposits
Low (<$100 bn)
Medium ($100 bn< x< $1 tn)
High (>$1 tn)
USD-LIBOR
>$150-160 tn
Syndicated loans
Business loans
Retail loans
Floating rate notes
Securitizations
OTC derivatives
Exchange-traded derivatives
Deposits
Low (<$100 bn)
Medium ($100 bn< x< $1 tn)
High (>$1 tn)
GBP-LIBOR
>$30 tn
Syndicated loans
Business loans
Retail loans
Floating rate notes
Securitizations
OTC derivatives
Exchange-traded derivatives
Deposits
Low (<$100 bn)
Medium ($100 bn< x< $1 tn)
High (>$1 tn)
CHF-LIBOR
>$6.5 tn
Syndicated loans
Business loans
Retail loans
Floating rate notes
Securitizations
OTC derivatives
Exchange-traded derivatives
Deposits
Low (<$100 bn)
Medium ($100 bn< x< $1 tn)
High (>$1 tn)

Road to 2021

From 2017 to 2021: Regulatory and market milestones

  1. April 2017

    SONIA selected as preferred GBP risk-free rate

    July 2017

    A. Bailey (FCA) speech on panel banks not being compelled to submit to LIBOR post 2021

    October 2017

    SARON recommended as the alternative to Swiss franc LIBOR

    April 2018

    SOFR published

    June 2018

    First-ever SONIA-based floating rate note, issued by the European Investment Bank

    July 2018

    First-ever SOFR-based floating rate note, issued by Fannie Mae

    September 2018

    €STR recommended as the alternative EUR RFR & replacement for EONIA

  2. July 2019

    EURIBOR authorised under EU Benchmarks Regulation

    October 2019

    €STR published. EONIA becomes €STR+Spread

    December 2019

    Transition to hybrid EURIBOR expected

  3. Q1 2020

    SONIA term rate available

    October 2020

    London Clearing House (LCH) and Chicago Mercantile Exchange Group (CME Group) move to SOFR Price Aligned Interest (PAI) and discounting

  4. Q4 2021

    SOFR forward looking term rate expected

    End of December 2021

    FCA will not compel panel banks to provide LIBOR submissions and EONIA ceases to exist

Additional information

Would you like to find out more?

Here you can find additional information on the LIBOR transition by business division. Information provided through these links is intended for existing clients with existing LIBOR-referencing transactions, trades or products with the relevant UBS business division only.

Personal & Corporate Banking

National working groups and industry bodies

Specific information relating to the LIBOR transition is published on the websites of national working groups and trade bodies. Selected website links are provided below.

Disclaimer