IBOR reform – 2020 more relevant than ever
At a glance
The reform of the Interbank Offered Rates (IBOR) has its origin in the financial crisis. The year 2020 is not only a key year in the implementation of the reform, but also makes the issue more topical than ever in view of the situation surrounding the coronavirus (COVID-19), the long-term consequences of which cannot currently be assessed. This article summarizes the background, objectives and status quo of the reform in a compact form and explains what effects are to be expected for banks and financial market participants, where action is needed and how we can support you in meeting the associated challenges.
Reference interest rates, such as EURIBOR or LIBOR, play a key role in the international financial markets, but are also of great importance in the private customer sector, especially in Austria. They form the interest basis for the variable-interest capital market and financial products such as loans, securities and deposits. The integrity of reference values is therefore of particular importance for the stability of the financial system.
The lack of regulation for a long time has made it possible to manipulate the reference values. The EU Benchmark Regulation (Regulation (EU) 2016/1011) has been in force since 1st January 2018 and provides for numerous transitional provisions. The background to the adoption of the regulation was allegations of manipulation and scandals in connection with LIBOR and EURIBOR. The panel banks were confronted with criticism of keeping interest rates artificially low in their own favour.
Objective of the reform and timeline
The aim of the reform is to eradicate the disadvantages of the existing reference interest rates, such as susceptibility to manipulation and instability in crisis situations, which became apparent during the financial market crisis. Thus, only reference interest rates that are robust, reliable, representative and cannot be manipulated meet the requirements of the Benchmark Regulation and may be used. Critical reference rates may – in accordance with the further extended transitional period – only be used or provided after 31 December 2021 if the index provider has submitted an application for admission and this application has not been rejected.
In detail, the timeline according to the Benchmark Regulation, which is equally challenging for providers and users, is as follows:
Where do we stand today?
EONIA was already replaced in October 2019 by the new standard reference interest rate in the euro zone, the Euro Short-Term Rate (€STER). Moreover, EURIBOR and LIBOR no longer meet the standards set out in the Benchmark Regulation and need to be reformed. This is mainly due to the existing methodology, which is largely based on estimates by panel banks rather than actual transactions.
The EURIBOR is to be redesigned in conformity with the Benchmark Regulation by means of a so-called hybrid method and in future will be determined primarily from actual transactions. Only if these do not exist can interpolated data of comparable transactions be used or only in the last resort, comprehensible model values. However, as 80% of all reports included in the hybrid method are still based on model calculations by the panel banks, the success of the EURIBOR reform is not yet guaranteed. Probably the most important change in the EURIBOR is the movement of the price day from T+2 to T+1. Following this, the previous day’s prices are published again and used as EURIBOR rates for that day.
The British Financial Conduct Authority has also announced that there will be no reform of LIBOR; instead, it will be discontinued as of 31 December 2021 and alternative reference interest rates will be used from this period onwards.
In parallel with developments in the EU and Great Britain, new reference interest rates were also introduced in other countries: Switzerland (SARON), USA (SOFR), UK (SONIA) and Japan (TONA).
Challenges of the reform
The replacement of EURIBOR and LIBOR or other reference interest rates not only represents a paradigm shift in the financial industry, but also poses a challenge not to be underestimated. The change not only affects the entire value chain of banks, but also has implications in many other areas such as contract management, trading, treasury and risk management.
Due to the deadlines of the benchmark regulation and the requirements of the supervisory authorities, banks and financial institutions should adapt their business models, contracts and systems to the new conditions as quickly as possible:
How PwC Legal can help you
We would be pleased to support you in analysing the effects and the implementation of necessary changes in your institute. Our experts with practical experience will advise you on a future-proof design:
- Support for transformation programs with individually tailored procedures – from holistic transformation projects to selective consulting;
- Review and adjustment of old contracts;
- Adaptation of contracts and model contracts for new contracts;
- Legal issues related to the reform; and
- Advice on regulatory inquiries and audits.
- Advice on all corporate and banking supervisory law issues
Your contact person
Mag. Irene Eckart, B.A.
PwC Legal | Director | Lawyer, Financial Services
Office: +43 1 384 05 50 | Mobile: +43 664 88639005