On July 8 The Reserve Bank of India (RBI) issued an advisory to banks and other regulated entities, emphasising the need for them to stop signing new financial contracts that reference the London Interbank Offered Rate (LIBOR) as a benchmark.
LIBOR is a benchmark rate against which global banks mark their transactions. It is the interest rate average submitted by leading UK banks. The transition from LIBOR was confirmed on March 5, when the UK Financial Conduct Authority (FCA) issued a statement announcing the cessation dates for all LIBOR settings. The FCA said all LIBOR settings will either cease to be provided by any administrator or no longer be representative after December.
The RBI said banks and financial institutions need to cease entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate as soon as practicable and in any case, by December 31, 2021.
The RBI urged banks and financial institutions to incorporate robust fallback clauses in all financial contracts that reference LIBOR and those maturing after the announced cessation date.
Banks have also been advised to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark that references LIBOR, as soon as practicable and in any event, by December 31, 2021.
When will LIBOR cease to exist?
The FCA has set a cut-off date of December 31, 2021, in the case of all pound sterling, euro, Swiss franc and Japanese yen settings (LIBOR transactions), and the 1-week and 2-month US dollar settings. It set June 30, 2023, as the cut-off in the case of remaining US dollar settings.
As of now, SOFR is widely expected (secured overnight financing rate ) will be accepted as the new benchmark rate. SOFR is linked to US treasury market transactions and is an identified replacement for USD LIBOR, which is expected to be phased out at the end of 2021.
State Bank of India has started using SOFR in place of LIBOR. On January 20, SBI said it executed two interbank short-term money market deals with pricing linked to SOFR.
ICICI Bank said it executed the first interbank money market transaction linked to SOFR. The transaction, executed through the bank’s Hong Kong branch, is part of its benchmark transition management plan to assess the preparedness towards a smooth transition to the new ARR, the bank said.