Welcome to KPMG’s latest issue of our monthly LIBOR newsletter in which we provide updates on LIBOR and other benchmark interest rate developments that directly impact banks and consider the potential implications of the related regulatory requirements.
1. PBOC to improve its benchmark interest rate system by promoting the use of interbank repo rates
The People’s Bank of China (PBOC) has released a whitepaper which sets out its upcoming plans on the benchmark interest rate reform, as part of its overall movement to align with the global involvement and best practices in the LIBOR transition ahead of the 2021 deadline. The whitepaper provided a roadmap and transition timeline for the benchmark interest rate transition in China, indicating upcoming plans on the application of new benchmark interest rates, promotion of the new benchmark reform for new contracts, and discussion on benchmark interest rate conversion plans for legacy contracts. Moreover, the PBOC announced the upcoming movements in promoting the application of interbank repo rates with a focus on depository institutions in various financial products including floating-rate bonds and floating-rate interbank certificates of deposit in the next phase. In terms of benchmark replacement rate, at present, PBOC has no plans at the moment to phase out the use of the Shanghai Interbank Offered Rate (SHIBOR) upon its reform in 2007.
KPMG’s perspective: Given that there is currently no plan to decommission SHIBOR, this whitepaper helps Chinese financial institutions to understand the latest regulatory expectations on SHIBOR’s future existence. It is also a useful policy statement to provide more guidance from the PBOC regarding the LIBOR transition timeline. For the Chinese banks with a local branch in Hong Kong, they should pay special attention to the document and ensure the transition strategy aligns with both the HKMA and PBOC’s expectations and requirements.
1 September 2020 PBOC
2. MAS pioneers the LIBOR exit with first ARR debt sale in Asia
The Monetary Authority of Singapore announced the issuance of a six-month floating rate note referencing Singapore Overnight Rate Average (SORA) with a total amount of S$500 million, the first note issue referencing alternative reference rate (ARR) in Asia.
Regulators and industry bodies in Singapore has been promoting wider use of SORA as the country transits from the SGD Swap offer rate, which is based on LIBOR in computation.
KPMG’s perspective: Despite Asia’s slower start in terms of issuing ARR products comparing to the US and Europe, Singapore has been leading various movements in Asia on the development of the alternative benchmark and setting industry standards to accelerate the transition in Asia.
21 August 2020 MAS
3. BOJ proposes cut-off date on new LIBOR based cash products by mid-2021
The Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks launched a public consultation on JPY interest rate benchmark establishment and reform. It is the second public consultation on the appropriate choice and usage of Japanese Yen interest rate benchmarks with consideration of the market developments since the first public consultation in July 2019. This latest consultation paper outlines the outcome of the Committee’s deliberation in refining the robustness of Term Reference Rates and a proposed transition timeline for cash products referencing JPY LIBOR maturing beyond 2021 to cease issuance by mid-2021.
KPMG’s perspective: This public consultation presented the results of the latest regulatory development in Japan based on the market feedback, as well as a more concrete transition plan regarding cash products referencing JPY LIBOR. The key transition milestone (i.e. to stop issuing LIBOR-referenced products that mature after 2021 by 30 June 2021).
7 August 2020 BOJ
1. ARRC releases updated recommendation on hardwired fallback language for bilateral business loans and technical reference documentation for syndicated loan conventions
The Alternative Reference Rates Committee (ARRC) issued an updated recommendation on contractual fallback language for USD LIBOR denominated bilateral business loans and a technical reference document to support the previous publication on syndicated loans conventions, as part of ARRC’s initiative in order to support an orderly transition away from LIBOR and drive industry efforts in voluntarily adopting to SOFR.
Similar to the recent refinements made on the ARRC recommendation for new originations of syndicated loans, the updated bilateral business loan fallback language provides adjustments to the “Hardwired Approach” and the “Hedged Loan Approach” under the final recommended language published in May 2019. The hardwired approach has been revised to include a recommended use of Daily Simple SOFR in the second step of the waterfall, whereas a benchmark rate floor has been included in the amended hedged loan approach.
On the other hand, the technical reference document for syndicated loans conventions compares different lookback and other potential calculation methodologies considered by the ARRC, including the recommended lookback without observation shift, and calculation methodologies for Daily Simple SOFR and Daily Compounded SOFR for loan products.
KPMG’s perspective: The reference documents provide critical information for financial institutions to consider when planning for the transition strategies, including the fallback languages for loans. The latest recommended fallback includes a change in the fallback waterfall from a compounded SOFR to daily simple SOFR. Financial institutions should carefully study the impacts to the legacy products transition and review the technical illustrations on the different interest calculation methods.
27 August 2020 ARRC
2. IASB finalises amendments to IFRS Standards in response to the LIBOR reform
The International Accounting Standards Board (IASB) issues its finalised amendment package to the IFRS Standards in relation to the global interest rate benchmark reform. The amendments intend to support companies in providing investors with information to help them understand the impacts of the reform on their financial statements.
The final amendments include changes to contractual cash flows, hedge accounting and disclosures, complementing to the amendments issued in 2019 which focuses on the potential effects on financial statements and reporting resulting from the replacement of the interest rate benchmark. The updated amendments will be effective for the reporting periods starting on or after 1 January 2021.
KPMG’s perspective: The updated amendments record the accounting implication for financial institutions to make potential changes to their financial reporting process in response to the LIBOR transition. Banks should take note to the changes applicable to them and the key timeline for the change.
27 August 2020 IFRS
3. ARRC refreshes best practices to encourage adherence to ISDA Protocol during escrow period
The ARRC issued an updated recommendation on the best practices to contemplate the International Swaps and Derivatives Association (ISDA)’s upcoming IBOR Fallback Protocol which will soon become available. The updated recommendation encourages prompt adherence to the ISDA Protocol which applies to a subset of derivatives market participants.
ARRC reiterated the importance of the ISDA IBOR Fallback Protocol in ensuring existing derivatives contracts contain robust and durable fallback provisions upon the discontinuation of LIBOR beyond 2021. Moreover, firms which have chosen to adhere to the Protocol will agree upon the condition that existing derivatives transactions they have entered into with other adherents will incorporate the new ISDA recommended fallback language.
.KPMG’s perspective: The ARRC recommended best practices is a useful preview of the to-be-published IBOR Fallback Protocol which intends to facilitate multilateral amendments to include the amended floating rate options in legacy derivative contracts.
19 August 2020 ARRC
4. ARRC Publishes the SOFR Starter Kit for key public information on the conversion to SOFR
The ARRC released the “SOFR Starter Kit” containing a set of factsheets with key information on the transition from USD LIBOR to SOFR which is the alternative reference rate endorsed by the ARRC. In contrast to the other recommendations issued by ARRC on detailed fallback language and interest calculation, this Starter Kit focuses on considerably generic information such as the background on the impetus for the LIBOR transition, the work conducted by ARRC in identifying a preferred alternative rate, facts and figures on SOFR and ideal next steps market participants can take in preparation for the transition.
The collection of factsheets are issued following the conclusion of the ARRC’s SOFR Summer Series as part of ARRC’s educational materials for industry professionals, media and the general public.
KPMG’s perspective: Financial institutions can make use of the SOFR Starter Kit to form client communication materials in order to promote their understanding on the LIBOR reform and the potential impact on clients regarding the reform. Moreover, banks are also recommended to arrange internal bank-wide trainings for all employees to improve awareness to the change in interest rate benchmark.
7 August 2020 ARRC
5. FINRA publishes guidance for broker-dealers in preparation for the LIBOR transition
FINRA issued a regulatory notice indicating practices for broker-dealers to better equip themselves to manage LIBOR’s phase-out. The notice includes a summary of results from a survey conducted across representative member firms, some of which with substantial transaction volume or positions in LIBOR referenced securities. It also provides potential questions for broker-dealers to consider and information on industry best practices in relation to governance framework, financial risk, operational risk, alternative reference rates, legal risk, and staff training and customer education.
KPMG’s perspective: The publication provides insight of different transition progress across the industry as financial institutions are discovered to be at varying stage regarding the LIBOR transition. Financial institutions are recommended to refer to this notice as an industry benchmark and update their implementation plan as they see fit.
5 August 2020 FINRA