In 2021 the end of Stibor has gone from if to when.
Last week we got announcements from both the Swedish bankers association as well as Finansinspektionen how the ending of Stibor will be announced.
First the Swedish Bankers association sent out a press release with suggested fallback language. The day after on December 17th the Swedish financial watchdog also sent out a press release in order to clarify some things related to what the Bankers association just said.
Source to the quote below: Finansinspektionen Dec 17th 2021.
Recommended actions in the event STIBOR is no longer provided The Swedish Bankers’ Association published a recommendation yesterday on the actions users of the STIBOR reference rate should take if STIBOR were no longer provided. Finansinspektionen (FI) would therefore like to clarify how we will issue statements, if necessary, in the event STIBOR ceases to be provided.
The communication is that there is no planned discontinuation of using the Stibor as a reference rate, but all the signs are in place for a transition to the alternative rate called Swestr. If Sweden follows the example set by FSA (Financial Services Authority) in the UK, the market should get an announcement about Stibor cessation well in advance. In the UK FSA made the announcement on March 5th, 2021 declaring Libor cessation by the end of 2021. Don’t be surprised if Sweden would follow suite and do something similar in 2022.
Another indication as to what is about to happen is that Riksbanken (the Swedish Central Bank) a few weeks ago published historical Swestr. The reason for this publication is to enable the market participants to calculate the five-year average spread between Swestr and Stibor before the announcement date of Stibor cessation.
Regulated financial institutions are already obligated to have fallback clauses in contracts related to financial instruments as well as in consumer credit contracts (BMR article 28.2).
We may at some point get an announcement by Finansinspektionen about Stibor cessation or another trigger event could unfold. When this happens, the spread adjustment will be known, and this will be of high importance to the parties involved. There has not been a lot of debate regarding the nature of the new alternative reference rate or the spread adjustment that will take place. In the work papers that has circulated in the financial community we have seen comments such as the new alternative reference rate experience lower correlation with the retail credit market. Below is a graph that shows how the compounded Swestr performed in the historical dataset that was published by Riksbanken a few weeks ago. We did put in the 3M Stibor in the same graph and calculated the spread between the two. This led us to a couple of conclusions.
- There has been a year-end effect on Swestr which lowered both Swestr and 3M Stibor during the last quarter of each year.
- During the initial turbulence due to Covid, Stibor took off whereas Swestr did not. This caused the spread to increase significantly. Also, an indication that feedback in earlier consultation that the short tenor of Swestr does not catch the loan market uncertainty in times of stress in the credit market may be a justified feedback.
- We believe a likely spread adjustment of just below 20 basis points (give or take) is likely for 3M Stibor contracts and loans. In the Swedish newspapers we have seen guesstimates of around 5 basis points adjustment, this seem to be pretty far off the likely outcome in our opinion.
For treasurers and other market participants it should come as no surprise if a Stibor cessation announcement comes in the early part of 2022.
The graph below uses data from: Riksbanken, Nasdaq and calculations by KPMG.
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