IBOR Transition

A number of interbank offered rates (“IBORs”) are either being reformed to make them more robust and reliable or, in many cases, are being, or have been, discontinued. Where the IBORs are being reformed they are expected to perform differently from the way they currently perform.
Regulatory authorities and public and private sector working groups in several jurisdictions have strongly encouraged the identification and use of alternative “risk-free rates” (“RFRs”) to replace (or, in some limited cases, to be used alongside) certain IBORs. These working groups have also published recommendations which consider how to support a transition to, and the development of new products referencing, these RFRs.

The U.K. Financial Conduct Authority (FCA), the supervisor of ICE Benchmark Administration (the administrator of LIBOR), announced in July, 2017 that it will no longer compel panel banks to submit rates required to calculate LIBOR after December 31, 2021. While the FCA announcement pertained to LIBOR specifically, an industry-wide response triggered an examination more broadly of other inter-bank offered rates (IBORs).

For more than 40 years, the London Interbank Offered Rate (LIBOR) was a key global interest rate benchmark that measured the unsecured borrowing costs between major global banks in particular currencies for certain tenors. Prior to December 31, 2021, LIBOR was calculated each business day for five currencies (USD, GBP, EUR, CHF and JYP) and for seven tenors in respect of each currency. LIBOR was referenced in wide variety of financial products including loans, mortgages, bonds and derivatives. Due to scandals and questions about its robustness as a benchmark rate over the last 10 years, it is being phased out. All GBP LIBOR, EUR LIBOR, CHF LIBOR and JYP LIBOR settings and two USD LIBOR settings were permanently discontinued or became non-representative after their last publication on December 31, 2021. All remaining USD LIBOR tenors will either cease to be published or become non-representative after June 30, 2023.

RFRs are overnight interest rate benchmarks which are perceived to (i) in some cases, be more representative and reliable than an IBOR and (ii) be more appropriate for use in certain products than an IBOR.

RFRs are overnight rates calculated retrospectively based on actual transactions, while IBORs are quoted forward-looking term rates that may rely, in part, on expert judgment.

No. For some currencies, a “multiple rate” approach is being adopted, which means that the IBOR for the relevant currency will continue alongside the RFR. For other currencies, it is likely that the IBOR will cease to be provided or be non-representative and so the principal interest rate will be the RFR.

CDOR:

6-month and 12-month CDOR tenors were permanently discontinued as of May 17, 2021. The administrator of CDOR, Refinitiv Benchmark Services Limited (“RBSL”) has also announced (PDF) that all remaining CDOR tenors will cease to be published immediately following June 28, 2024.
The Canadian Alternative Reference Rate working group (“CARR”) will implement a two-stage transition (PDF) plan with respect to CDOR as follows:

Stage 1: By the end of June 2023, all market participants are expected to transition new derivative and securities transactions from CDOR to overnight CORRA in-arrears. No new CDOR exposure can be booked after that date with limited exceptions including hedging of legacy CDOR derivative or securities exposures and hedging of CDOR referencing loans transacted until June 28, 2024; and

Stage 2: Market participants would be allowed to transact in new CDOR based loans, with robust CDOR fallbacks, until the cessation of CDOR. Hedging of these CDOR based loans with CDOR based derivatives will be permitted until this date.
The Canadian prudential regulator has also issued a letter (opens to another site) outlining its expectations of federally regulated financial institutions with respect to CDOR transition which is consistent with the two-stage transition plan outlined above.

CORRA:

The Bank of Canada took over the responsibility for the calculation and publication of CORRA on June 15, 2020. The announcement includes a new calculation methodology (opens to another site) for CORRA, sometimes referred to as enhanced CORRA. The rate for a given day will be available on the Bank of Canada CORRA webpage at approximately 09:00 ET on the following business day.
The CARR published recommendations (opens to another site) to facilitate the use of CORRA on November 23, 2021. The CARR has also launched a consultation (PDF) on a potential term rate (ie. Term CORRA) to replace CDOR in certain loan and hedging arrangements.

A mismatch may arise if a derivative transaction is used to hedge a loan (or other products such as a bond) and does not deal with the discontinuation of the IBOR or the calculation of RFRs in the same way. Any mismatches may also impact the accounting treatment (such as hedge accounting) and tax treatment. Parties should familiarize themselves with how IBORs are defined in their product documentation and how the related fallbacks apply to the cash product and any derivative transaction intended to serve as a hedge and take professional advice as to the potential impact and risks associated with the discontinuation of these IBORs.

RBC has established a global program and is, amongst other things, (i) identifying the products which reference affected interest rates, (ii) engaging with clients on the consequences of the reform and/or discontinuation, (iii) considering how different products may be affected: and (iv) transitioning to RFRs (where relevant), including by adding or updating fallbacks or actively transitioning IBOR linked products to RFRs where possible, issuing RFR floating rate notes, trading RFR swaps and providing RFR loans. RBC will also not be entering into any new USD LIBOR referencing contracts unless the contract falls within certain specified exceptions.