Background

A wide range of financial products such as loans, derivatives, floating rate notes, structured products and mortgages, use benchmark interest rates to determine interest payment obligations. They are also used as a measure of market expectation, for example with respect to central bank interest rates, liquidity premiums in the money markets and, during periods of stress, as an indicator of the health of the banking system.

The London Interbank Offered Rate (LIBOR) is the most widely used interest rate benchmark and is calculated in five different currencies: GBP (British Pound), USD (US Dollar), EUR (Euro), JPY (Japanese Yen) and CHF (Swiss Franc). Other currencies also use specific benchmark rates such as EURIBOR and EONIA for EUR, the Hong Kong Interbank Offered Rate (HIBOR) for Hong Kong Dollar, the Singapore Interbank Offered Rate (SIBOR) for Singapore Dollar and the Tokyo Interbank Offered Rate (TIBOR) for JPY.

In 2014, the Financial Stability Board (FSB) undertook a review of major interest rate benchmarks following concerns raised by a wide range of stakeholders regarding the reliability and robustness of interest rate benchmarks such as EURIBOR, LIBOR and TIBOR.

The FSB established a high-level Official Sector Steering Group of regulators and central banks. Work by this group resulted in recommendations from the FSB to reform major interest rate benchmarks. [1] In particular, they recommended the identification and use of alternative benchmarks that are based on more active and liquid overnight lending markets to replace inter-bank offered rates (IBORs). These alternative benchmarks are being described by the market and industry as risk-free rates (RFRs).

IBOR Transition

Regulators, alongside industry bodies and various working groups of private-market participants, including the Loan Market Association (LMA), International Swaps and Derivatives Association (ISDA), the Sterling Risk-Free Rates Working Group, the Working Group on Euro Risk-Free Rates, and the Alternative Reference Rates Committee (ARRC), have been discussing alternative benchmark rates to replace the IBORs. RFRs are being discussed for each LIBOR currency. The industry efforts in support of the transition to these rates is well underway, although there remains much to be done.

These reforms will affect different IBORs in different ways. Some reforms relate to a change in methodology of how the interest rate benchmarks are calculated (for example, with respect to the reform in EONIA and EURIBOR in 2019) [2]. Other reforms are based on the movement away from certain benchmarks entirely (as with LIBOR).

These reforms will impact existing and future MUFG products and services.

What are RFRs and will they replace LIBOR?

As previously noted, RFRs have been designated for each currency for which LIBOR is currently published. RFRs are generally based on overnight deposit rates (and repurchase agreements [repos] in the U.S). Therefore, they are considered to be more robust than IBORs as they are based upon a larger volume of observable transactions. RFRs also differ from LIBOR in a number of other important ways:

  • LIBOR is a term rate and so is set prior to the commencement of the interest period to which it relates. This allows a borrower future certainty as it will be able to calculate at the outset of the interest period the amount of interest which will be payable. Most RFRs are backwards looking and are published the day after the period to which they relate meaning the borrower may only know shortly before or on the interest payment date how much interest it owes.
  • The calculation of LIBOR includes a premium for bank credit risk for the relevant tenor. RFRs do not include the same premium and therefore the interest rate payable may be different.
  • LIBOR is administered in London and published on or about 11 am London time for a number of different currencies. Risk-free rates are each administered locally in each currency jurisdiction and published at different times.

What are the replacement benchmarks and which IBORs are changing?

Some examples of commonly used benchmarks which are either being replaced or benchmarks which are having their methodology amended are set out in the table below.

Note that the below table is not an exhaustive or determinative list of alternate rates for each of the IBORs set out nor is it representative of MUFG's views on any alternate rates. There may be other benchmarks or IBORs which are either discontinued or where changes have or will be made to their methodology.

Currency Current rate Alternate Rate Anticipated Developments
CHF CHF LIBOR SARON (Swiss Average Rate Overnight) Transition to SARON
EUR EONIA €STR (Euro Short-Term Rate), the RFR for EUR, published since 2 October 2019. Transition to €STR. EONIA continues to exist under a new methodology since 2 October 2019 to allow a smooth transition to €STR and will be discontinued on 3 January 2022. [3]
EUR EURIBOR or EUR LIBOR Reformed EURIBOR, €STR, the RFR for EUR, has been published since 2 October 2019. Multiple rate approach.
The reformed EURIBOR is expected to continue alongside €STR.
As with other LIBORs, EUR LIBOR is expected to be discontinued, market participants are expected to transition to €STR. [4]
GBP GBP LIBOR SONIA (Sterling Overnight Index Average) was subject to a number of reforms and these were implemented from 23 April 2018. Transition to SONIA.
HKD HIBOR HONIA (Hong Kong Overnight Index Average), the pre-existing RFR for HKD. Reforms to HONIA are currently being considered. Multiple rate approach. HIBOR is expected to continue alongside HONIA.
JPY JPY LIBOR and TIBOR (Japanese Yen TIBOR and Euroyen TIBOR) TONAR (Tokyo Overnight Average Rate), the RFR for JPY also called TONA, is a pre-existing rate. TIBOR (Tokyo Interbank Offered Rate) is being reformed. Multiple rate approach. JPY TIBOR is expected to continue alongside TONAR. It is possible that Euroyen TIBOR will be discontinued.
SGD SIBOR (Singapore Interbank Offered Rate) Reformed SIBOR. SIBOR, a pre-existing rate largely used for cash products which is undergoing reform.
SGD SOR (Swap Offer Rate) SOR rate is actively being phased out, as SORA (Singapore Overnight Rate Average) is introduced as its new RFR benchmark. Multiple rate approach is expected. The Association of Banks in Singapore and the Singapore Foreign Exchange Market Committee will start the consultation process in H1 2020.
USD USD LIBOR SOFR (Secured Overnight Financing Rate) has been published since April 2018. Transition to SOFR.

LIBOR Risk Disclosure

As set out above, it is uncertain whether LIBOR will continue to be produced and published after the end of 2021. If LIBOR is discontinued, the contractual terms in your agreements with us may provide a process for determining a fallback but it may still be unclear and uncertain what rate would be referenced as a result of following such process. Due to this lack of clarity and certainty, there is no way to know at this time whether you would be disadvantaged economically. Timing for any discontinuation of LIBOR may vary across different currencies and tenors in which LIBOR is currently produced and such timing may differ from the timing for any discontinuation of other interbank offered rates (IBORs). In addition, the discontinuation of LIBOR may result in a mismatch between the rate referenced in one financial instrument as against other financial instruments, including potentially those that are intended as hedges for a particular transaction.

This page and its related content are not intended to be, and should not be relied upon as, legal, financial, tax, accounting or other advice. We are not providing you with any such advice and you should consult your own advisors for advice on the reform of interest rate 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 were last updated in Feb 2020. Material developments may have occurred since this last update. This page and its related content do not consider risks to you from interest rate reform and there may be other issues that are not highlighted below. Without limiting the foregoing, this page and its related content do 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 these this information may be put. The areas covered herein are continually evolving and you should consult the relevant sources. Links to some of the relevant working and industry groups are at the end of this document.


Useful links

For further background information, the following websites contain useful information:


[1] Reforming Major Interest Rate Benchmarks, FSB 22 July 2014 www.fsb.org

[2] For more information, please see www.emmi-benchmarks.eu

[3] www.emmi-benchmarks.eu/euribor-eonia-org/about-eonia.html

[4] www.emmi-benchmarks.eu/euribor-org/about-euribor.html