LIBOR transition- What it means for Indian Banks: Current Affairs Special Series

Team Adda247 and BankersAdda are here with a Current Affairs Special Series. In this series, candidates will be introduced to current affairs topics daily, which will not only improve their general awareness but also will ensure that the candidates do not lack in any current affairs topic. Today’s Current Affairs topic is LIBOR transition- What it means for Indian Banks.

LIBOR transition: What it means for Indian Banks

The Reserve Bank of India has issued an advisory to banks and other regulated entities on July 8, emphasising the need for them to stop signing new financial contracts that reference with the London Interbank Offered Rate (LIBOR) as a benchmark. The advisory was part of a worldwide transition of the financial institutions from old benchmarks to new alternative reference rates.

LIBOR: London Interbank Offered Rate is a benchmark rate against which global banks mark their transactions. Leading UK banks submitted their interest rate and on that basis average rate is calculated and this average rate is known as LIBOR. 

The transition from LIBOR was approved by issuing the statement about the cessation dates for all LIBOR settings announced by the UK Financial Conduct Authority (FCA). The FCA directed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative after December 2021.

FCA on LIBOR cease:

The FCA has decided a cut-off date of December 31, 2021, for the all pound sterling, euro, Swiss franc and Japanese Yen (LIBOR transactions) settings, and the 1-week and 2-month for US dollar settings. The remaining US dollar settings would be done before June 30, 2023. 

RBI & LIBOR transition: 

RBI advised banks and financial institutions to assess their LIBOR exposures that would mature after the cut-off date of LIBOR and also frame a board-approved plan for steps to be taken to face risks arising from the transition. The regulator has now issued a new advisory (guidelines) to banks to prepare for the transition. 

The RBI urged banks and financial institutions to integrate robust fallback clauses in all financial contracts that reference LIBOR and those maturing after the announced cessation date. Banks are also 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. 

Impact of LIBOR transition on Banks:

Banks use benchmark rates like LIBOR widely to price international transactions and white issuing other financial instruments. They need to prepare for a transaction to cut down future transaction risks by identifying a new benchmark rate at the earliest. Banks would be forced to work on updating their system and agreements. It will be a very complex exercise for banks since LIBOR has been used for a long and the deadline is the end of the year (i.e.31 December 2021). It will be also completive for big companies which are looking for international borrowings or bond issues.