End of LIBOR
The end of LIBOR, as a benchmark for the derivatives and financing market, is approaching, and at Bci we want to accompany you step by step in the transition process. Our commitment is to always deliver the best experience to our clients, that is why we explain some of the changes that are being generated in the industry
As already announced, the end of the LIBOR rate is closer and closer and at Bci we want to accompany you in this process, providing timely and reliable information, generating value for your business.
End of LIBOR
IBOR rate
The name is derived from Interbank Offered Rate, or interbank offer rates. They are benchmarks for unsecured loans between banks, which have been widely used by different markets for almost half a century. Among the best known are LIBOR and EURIBOR.
What is the LIBOR rate?
It is an interest rate in dollars of the United States of America that is used as a reference to calculate the interests of a series of financial products, such as credits, swaps, bonds, among others. Libor is determined from the rates reported by a panel of banks as an estimate of the rate at which funds could be borrowed in an unsecured financing market.
Financial Conduct Authority (FCA) of the United Kingdom, in its capacity as regulator and supervisor of LIBOR, has announced that after December 31, 2021, banks will not be able to be persuaded or forced to report the interbank rates required to determine the rate LIBOR. Consequently, said rate would cease as of the aforementioned date.
What will happen then to the Libor rate?
The world's central banks and regulators continue their preparation for the discontinuation or cessation of the Libor rate. This is how the Working Group on Risk-Free Reference Rates agreed by the Bank of England and the Financial Conduct Authority (FCA) of the United Kingdom, and the Committee on Alternative Reference Rates (ARRC) agreed by the Federal Reserve of the States. The United States (Fed) and the Federal Reserve Bank of New York (NY Fed) have made announcements and released updates on their efforts to adopt more reliable benchmark rates to replace Libor.
During the year 2017, ARRC identified SOFR (Secured Overnight Funding Rate) as an alternative recommended replacement rate for the LIBOR Rate in dollars of the United States of America.
SOFR is a measure of the daily cost of borrowing, guaranteed by US Treasury Securities. For reference purposes, SOFR is a rate that is established based on the US Treasury buyback market, where banks and Investors lend or borrow these bonds overnight, which is administered by the Federal Reserve Bank of New York (NY Fed), and published on the website http://www.newyorkfed.org.
In addition to the SOFR, alternative replacement rates were defined for other currencies such as British Pounds, Swiss Francs, Yen, and Euros.
| Name | Administrator | Coin | Kind |
|---|---|---|---|
| SOFR | Alternative Reference Rates Comitee (ARRC) | USD | Securitized Overnight |
| Reformed SONIA | Working Group on Sterling Risk-Free Rates | GBP | NOT Securitized Overnight |
| SARON | National Working Group on Swiss Franc Reference Rates | CHF | Securitized Overnight |
| TONAR | Study Group on Risk-Free Reference Rates | JPY | NOT Securitized Overnight |
| ESTER | Working Group on Euro Risk-Free Rates | EUR | NOT Securitized Overnight |
In a first stage, in BCI we will work to implement SOFR and ESTER, for dollars of the United States of America and Euros respectively.
Is the new SOFR rate equal to the Libor rate?
No. Market participants and ARRC members are working to propose an adjustment spread, to make LIBOR and SOFR more comparable. It would be a one-time adjustment, which would be applied mainly to financial products in force at the end of 2021 and agreed at LIBOR, mainly to credits and derivatives.
In order to carry out the contractual remediation, the contracts that have been entered into must be modified, which must be replaced by SOFR when the Fallback triggers are activated and LIBOR is discontinued.
What are the main differences between the Libor rate and the SOFR rate?
The LIBOR rate is published at different terms, the most common being one, three and six months, and includes an average premium for bank credit risk for each of the published terms.
For its part, SOFR is a single daily (overnight) reference rate, free of risk (or guaranteed) similar to other money market rates and is also based on real transactions of the largest financing market with operations of Pacts on Securities of the Treasure of the world (Repo market).
Likewise, SOFR does not have a spread or premium for the term [bank] credit risk; therefore, it is a risk-free rate.
How does this change affect me as a customer?
If you maintain financial products agreed in dollars of the United States of America with a floating interest rate, such as credits, deposits, Swaps, or other products, whose maturity falls on a date after December 31, 2021, we will contact you in order to communicate details of the transition process and report on best market practices.
How is Bci preparing for the transition from Libor to SOFR?
At Bci we have been working on a transition plan since 2019, in line with international recommendations and best practices.If you have any questions or concerns, you can contact your commercial executive and / or the Bci transition team at consultaslibor@bci.cl.
Soon we will continue to publish relevant information about this transition process.
| USD LIBOR | SOFR | |
|---|---|---|
| Definition | Interbank rate for loans (includes credit risk) | Risk-free rate |
| Kind | Not Securitized | Securitized with American Treasury Bonds |
| Maturity / Term | Various terms: Overnight, 1 week, 1 month, 3 months, etc. | Overnight |
| Methodology | Based on bank surveys and expert judgments | Based on market transactions |