IBOR TRANSITION: Summary of Key Points

The topic of the IBOR transition first emerged in 2014 concerning the GBP, following a recommendation from the Financial Stability Board for the adoption of new Risk Free Rates (“RFR”), and another recommendation in 2015 for the adoption of the Sterling Overnight Index Average (“SONIA”), marking the scheduled end of LIBOR GBP.

The Bank of England's working group has been responsible for replacing LIBOR GBP since 2015, with the following key milestones noted thereafter:

• 31 December 2021: cessation of publication of EONIA, LIBOR GBP, LIBOR JPY, LIBOR CHF, and LIBOR EUR
• Since around 2019, fallback clauses have been almost systematically integrated into documentation to anticipate and facilitate rate changes:

• • Definition of a trigger event
  • Possible designation of the replacement rate
  • Definition of consent provisions, etc.

Note: Unlike IBOR rates, which are forward-looking rates for specified periods (3/6/12 months, etc.), RFRs are overnight rates that cannot be used as they are. Thus:

IBORRFRsRateForward-looking determined 2 business days before the start of the period and fixed for the entire period (simple calculations)Backward-looking determined a few business days before the end of the periodRate accessibilityDirectly accessible on Bloomberg (among others) and consultable by all partiesApplied daily (at least for SONIA) and compounded with various calculation methods:

• Different lookback periods
• Different ways to apply the floor
• With/without Observation Shift
• With/without Credit Adjustment Spread

Knowledge of the interest amountAt the beginning of the periodA few business days before the end of the period

Furthermore, regarding USD, the end of LIBOR USD has been scheduled for 30/06/2023. The Secured Overnight Financing Rate (“SOFR”) has been designated as the replacement RFR, but the transition options are broader than those for GBP. The Alternative Reference Rates Committee (“ARRC”) recommends:

• • • As a priority: to apply a SOFR backward-looking compounded rate (as with SONIA)
    • If necessary (if the transition proves challenging): to apply the "Term SOFR," a forward-looking rate published by CME Group, based on SOFR derivatives (which represents market expectations for SOFR over the next 3/6/12 months). The transition is "painless" as this rate applies in the same manner as LIBOR.

Having undergone a recalibration of its calculation methodology in 2019, Euribor is now compliant with the BMR (Benchmark Regulation). It can therefore continue to be used for both existing and new contracts, but there is currently no indication that it will cease to be published in the near future. Nevertheless, the European working group is developing alternative methodologies based on €STR, in the event that Euribor were to be discontinued permanently.

For more information, please find our white paper, co-authored with Kerius Finance, here: www.aetherfs.com/fr/remplacement-des-taux-euribor-libor-2