Interest rate benchmarks (such as the London Interbank Offered Rate (“LIBOR") and other Interbank Offered Rates (“IBORs") (“Benchmarks") are widely used today to determine payments under many forms of financial products. These Benchmarks have been subject to increasing global regulatory scrutiny, with regulators signalling the need to use alternative Benchmarks.

All counterparties to a financial product or contract that references LIBOR will need to take action to remove any dependence on these Benchmarks beyond 2021. The UK regulatory expectation is as follows:

  • After the end of Q3 2020, all new and re-financed LIBOR referencing loans should include pre-agreed conversion terms or an agreed process for renegotiations to SONIA or other alternatives.
  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.
  • Firms cannot rely on LIBOR being published after the end of 2021.

What you need to know in respect of contracts which reference a Benchmark that is subject to reform or cessation
Parties entering into transactions that continue to use Benchmarks subject to reform or cessation are exposed to the risk that the reforms and/or transition processes will:

  • Result in the discontinuation or reform of one or more Benchmarks: Benchmarks that are currently the subject of proposals for reform or discontinuation include, but are not limited to: U.S. dollar LIBOR, British pound sterling LIBOR, Swiss Franc LIBOR, Japanese Yen LIBOR, EUR LIBOR and EONIA.
  • Result in one or more Benchmarks performing differently than in the past: financial products which reference existing Benchmarks that are scheduled to be discontinued may perform differently. For example, the Benchmarks may be higher, lower or more volatile than in the past. This means you may be paying more or receiving less than you otherwise would have expected. Also, the value of the product may alter as a result of the change to a Benchmark and so it may be worth more or less than it would have been the case if the Benchmark continued to be available.
  • Require a need to determine or agree an alternative reference rate: although some products will contain fallback provisions if a relevant Benchmark ceases, these may not provide a long-term solution and may differ across products. Some products may not include fallback provisions at all.
  • Require adjustments to the identified fallback alternative reference rate: there may be differences in methods of calculations or conventions used in respect of alternative reference rates across the market. This means that payments and valuation in respect of similar financial products or linked financial products may be different.
  • Require legacy financial contracts and confirmations to be updated: it may become necessary to amend documents and contracts which reference Benchmarks planned to permanently discontinue.
  • Result in a mismatch between the rates in commercially-linked instruments: such as a bond or loan and that is referenced in another instrument such as a derivative, including where the derivative is intended to operate as a hedge.

MUFG is actively working on transition away from LIBOR and planning has already begun to migrate to one or more alternative rates. We are assessing impacts, managing LIBOR transition and seeking to mitigate risks. We plan to be in touch as transition tools, methods and timing become clearer.

If you wish to obtain further information, enquiries can be made to ibor@uk.mufg.jp (MUFG Bank) or ibor@mufgsecurities.com (MUFG Securities) or visit our website at LIBOR.

NOTE that we are not providing you with any advice and you should consult your own advisors for advice on the reform of Benchmarks and the related risks. We make no representation and provide no warranty as to the information set out in herein, which is based on information from third parties, and you should not rely on any such information as constituting a representation or warranty. The content herein is not intended to be comprehensive and was last updated in April 2020. Material developments may have occurred since this last update. The information herein does not consider risks to you from interest rate reform and there may be other issues that are not highlighted above. Without limiting the foregoing, information herein does not address issues specific to any particular sector or business. We are not acting as your fiduciary or adviser and the provision of this information to you will not give rise to any duty of care. We assume no responsibility for any use to which this information is put. The areas covered herein are continually evolving and you should consult the relevant sources.