Beyond LIBOR

A guide to changes in the world of interest rate benchmarks.

LIBOR cessation

Please note: the information on this page refers to activities leading up to LIBOR’s cessation on 31 December 2021. Content was last updated in 2021. Please contact your client advisor or sales specialist to discuss any questions on the LIBOR transition and how it affects your portfolio.

Overview

The London Interbank Offered Rate (LIBOR), one of the main and most important interest rate benchmarks used in global financial markets, is going away – permanently. Despite its importance and being linked to contracts worth trillions of US dollars, LIBOR’s shortcomings have led regulators to opt for a transition away from LIBOR to alternative reference rates (ARRs), also known as risk-free-rates (RFRs).

Creating viable alternatives has proved no easy task. We are actively involved in the industry transition with regulators, central banks and industry bodies. We aim to ensure a smooth transition for our clients as well as for the resilience of financial markets. We support the transition to ARRs and are committed to helping our clients navigate through to a world beyond LIBOR.

Why LIBOR is being replaced

The LIBOR benchmarks rely on submissions from banks of their borrowing costs. However, the market on which LIBOR is built has fundamentally changed since the global financial crisis. The lack of activity in the underlying market means that LIBOR is no longer sustainable.

The UK's Financial Conduct Authority (FCA) has secured agreement from the submitting banks that they will keep contributing to LIBOR until end-2021. This will give users time to switch to alternative rates based firmly on transactions.

Since 2017, market participants around the globe have been preparing for the transition to alternative methods. With LIBOR’s end date now confirmed comes certainty that reliance on LIBOR must stop.

What it means for our clients

The transition from LIBOR and some other IBORs will affect many clients and impact existing and future transactions across contract types. This ranges from mortgages with private households to corporate loans and derivatives trading.

We have assessed how the transition may impact IBOR-linked transactions and products and have already begun enhancing our product offering so that options using alternative reference rates (ARRs) are available for you.   

It is important that you know which of your contracts reference LIBOR and understand how and when the transition will impact these positions. Carefully review communications relating to your LIBOR-referencing positions as these will inform you of changes and/or available options. These may include amending your contracts to reference alternative rates or providing contractual arrangements that will apply when LIBOR is no longer available.

Questions? Contact your client advisor or sales representative.

 [We now] mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system. With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.
Andrew Bailey, Bank of England Governor, March 2021

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 underway?

  • 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.

When will LIBOR cease?

  • As widely anticipated, the FCA announced on 5 March 2021 that panel bank submissions will cease immediately after 31 December 2021 for all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings. The FCA also announced that the remaining LIBOR settings for US dollar will cease on 30 June 2023. As a result of this cessation event, the fallback spread adjustment, published by Bloomberg, is now fixed.
  • The FCA’s statement provides much-needed clarity and certainty on the way forward for the entire industry. We are working in close coordination with market working groups and official sector bodies, including the Financial Stability Board, to ensure smooth transition in advance of LIBOR ceasing.

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 have been working on enhancing our product offering by launching new products that reference the new alternative reference rates.

How will the transition affect your portfolio?

  • We have assessed how the transition may impact IBOR-linked transactions and products, while closely monitoring market developments. In many cases, impact varies by currency and product type. We will continue to inform you of upcoming changes; however, 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 industry wide recognized 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.

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 titled "Alternative rates".

What is fallback language?

  • Fallback language refers to the contractual provisions that specify the trigger events for a transition to a replacement rate, the replacement rate, and the spread adjustment to align the replacement rate with the benchmark being replaced.
  • UBS has generally incorporated fallback language in new contracts referencing LIBOR to help facilitate a smooth transition to alternative reference rates. UBS continues to seek to ensure that fallback language in UBS-issued contracts remains in line with general market standards.
  • For OTC derivatives, the ISDA IBOR Fallbacks Supplement and Protocol, published on 23 October 2020 and effective as of 25 January 2021, provide a key mechanism for incorporating fallback language in derivative contracts. On the effective date, all new derivatives contracts that reference specific IBORs will contain fallback language. Existing derivative contracts will contain the new fallback language if both parties adhere to the protocol or bilaterally agree.
  • Regulators expect active transition to new ARR products as the primary transition strategy. This may involve renegotiation, contract amendment, repapering and/or rebooking, as well as an assessment of risks and costs.

UBS has adhered to ISDA's IBOR Fallbacks Protocol. What does this mean?

  • Where both bilateral parties in over-the-counter derivatives adhere to the ISDA IBOR Fallbacks Protocol, relevant trades will have certainty of replacement rates at fallback. 
  • Fallback within the protocol is triggered once LIBOR is deemed to be non-representative or ceases to be published. Relevant trades are those traded before 25 January 2021 and are included in the list of documentation types within the ISDA IBOR Fallbacks Protocol.

Are there any changes to other benchmark rates?

  • Many other benchmark rates e.g., EURIBOR in the Euro area, HIBOR in Hong Kong, BBSW in Australia, CDOR in Canada, and TIBOR in Japan, are not administered or regulated in the same way as LIBOR and are expected to remain until any announcements by the relevant administrators are available. Some of these rates have already undergone reform or may be subject to changes in the future.
  • LIBOR serves as an input into the calculation of certain benchmark rates, for example: SOR in Singapore, THBFIX in Thailand and PHIREF in the Philippines all rely on US dollar LIBOR. The regional regulators have issued transition milestones on ceasing new use of these local benchmarks and reducing legacy exposures.

Alternative rates

 

A consensus has been reached among market participants on 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:

  • 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 in most currencies.
  • There are several ongoing initiatives that aim to provide term structures for ARRs. Methods being considered include compounding overnight rates over a period or deriving a term structure based on overnight index swaps and futures.

Alternative reference rates 

Currency

Current Rate

Alternative

Secured / Overnight

Term Rate

U.S.

USD LIBOR

Secured Overnight Financing Rate (SOFR)

Secured / Overnight

CME Term SOFR

U.K.

GBP LIBOR

Sterling Overnight Index Average (SONIA)

Unsecured / Overnight

Term SONIA

Switzerland

CHF LIBOR

Swiss Average Rate Overnight (SARON)

Secured / Overnight

Not Expected

Japan

JPY LIBOR

Tokyo Overnight Average Rate (TONA)

Unsecured / Overnight

Tokyo Term Risk Free Rate (TORF)

Euro Area

EONIA, EUR LIBOR

Euro Short-Term Rate (€STR*)

Unsecured / Overnight

TBC

*€STR is intended to replace the EONIA at the end of 2021. No potential cessation date has been given for EURIBOR

Transition challenges

A number of benchmark transition challenges have 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.

Conduct risk

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

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 is 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.

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.

1Source: ISDA, IBOR Global Benchmark Survey, 2018 Transition Roadmap, February 2018

Road to cessation

From 2017 to 2021 and beyond: Regulatory and market milestones

  1. 2017 - 2018
  2. 2019
  3. 2020
  4. 2021
  5. 2022 - 2023

  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. March 2020

    SOFR Averages and Index available

    March 2020

    SARON Compound indices available

    June 2020

    Federal Home Loan Banks (FHL) stop entering into LIBOR instruments

    July 2020

    London Clearing House (LCH), Chicago Mercantile Exchange Group (CME Group) and Eurex move to €STR Price Aligned Interest (PAI) and discounting

    August 2020

    SONIA Compounded Index first published

    October 2020

    LCH, CME Group and Eurex move to SOFR PAI and discounting

    October 2020

    International Swaps and Derivatives Association (ISDA) launches IBOR Fallbacks Supplement and Protocol

    Q3 2020

    Non-LIBOR alternatives available and include contractual conversion mechanisms in new or refinanced LIBOR product

    December 2020

    Amend interdealer Credit Support Annexes (CSA) to reference SOFR interest for USD collateral. No USD LIBOR FRNs maturing after 2021 issuance

  4. January 2021

    SONIA term rate published

    January 2021

    Effective date of IBOR Fallbacks Supplement and IBOR Fallbacks Protocol

    March 2021

    FCA announces that most LIBOR settings will cease immediately after 31 December 2021

    March 2021

    Cease initiation of new GBP LIBOR linked loans, bonds, securitizations and linear derivatives expiring after Dec 2021. Complete identification of all legacy GBP LIBOR contracts expiring after end 2021 that can be actively converted, and accelerate active conversion where viable

    March 2021

    Plans for the reduction of “tough legacy” for existing CHF and EUR LIBOR contracts. Initial contact to clients

    April 2021

    Readiness to offer SORA-based products. Cease issuance of SOR-linked loans and securities that mature after end 2021

    June 2021

    No new LIBOR derivative trades, maturing after 2021. No business loans using USD LIBOR and maturing after 2021. No floating-rate securitizations using USD LIBOR in its tranches and maturing after 2021. Disclose the replacement rate and any related spread adjustment methodology at least 6 months prior to the date that a replacement rate would become effective for FRNs, securitizations and loans

    June 2021

    Cease initiation of new GBP LIBOR non-linear derivatives that expire after end 2021. Progress active conversion of all legacy GBP LIBOR contracts expiring after end 2021 where viable and, if not viable, ensure robust fallbacks are adopted where possible

    June 2021

    Mitigation of risks for remaining “tough legacy”. New contracts in CHF, EUR, GBP, JPY and USD only in ARR. System and process changes necessary to enable transition to ARR and the application of fallback rates

    June 2021

    Cease the issuance of new JPY LIBOR referencing loans, bond and notes

    July 2021

    Switch swap quoting convention to TONA as soon as possible and no later than end July 2021

    September 2021

    Cease new JPY LIBOR swaps as soon as possible and no later than end September 2021. Significantly reduce the amount of loans, bonds and notes referencing JPY LIBOR

    September 2021

    Complete active conversion of all legacy GBP LIBOR contracts expiring after end 2021

    September 2021

    Cease usage of SOR in new derivative contracts. Cease usage of SIBOR in new contracts

    September 2021

    Cease new cross-currency derivatives with a LIBOR-linked GBP leg expiring after 2021, except for risk management of existing positions

    December 2021

    End of LIBOR for all GBP, EUR, CHF and JPY settings, and 1-week and 2-month USD settings. End of EONIA

    December 2021

    Cease new use of USD LIBOR as soon as practicable and in any case by 31 December 2021

    December 2021

    All new transactions with variable interest in CHF, EUR, GBP, JPY, and USD should be based on ARR by 31 December 2021

  5. January 2022

    EONIA cessation

    June 2023

    End of remaining USD LIBOR settings

Additional information

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

These materials have been prepared by UBS AG and/or a subsidiary and/or an affiliate thereof (“UBS”).

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