ASIC encourages directors to plan early for the transition from the London Inter-bank Offered Rate (LIBOR) to alternative reference rates (ARRs). This article provides a brief background on the LIBOR regime, explains when and why the transition is occurring, and provides guidance on what directors might need to do to prepare for the transition if the company is exposed to LIBOR.
ASIC has also written directly to ASX100 companies on planning for LIBOR transition.
By the Australian Securities and Investments Commission (ASIC)
What is LIBOR?
LIBOR is an interest rate benchmark based on submissions from 20 panel banks. It measures the average rate at which the 20 panel banks could obtain unsecured wholesale borrowing.
LIBOR is referenced in more than US$350 trillion worth of financial contracts globally including derivatives, loans and investment holdings. It is deeply embedded in business processes, including in accounting methodologies, models and valuation systems.
LIBOR is calculated in five currencies and seven tenors (the length of time until the loans are due).
When and why is the transition from LIBOR occurring?
After 31 December 2021, the Financial Conduct Authority (FCA) will no longer compel the 20 panel banks to submit to LIBOR. This was announced by the FCA in July 2017. It is expected that LIBOR will cease to be published after that date, in light of concerns as to whether the markets underlying the LIBOR benchmarks are sufficiently active to produce a robust rate.
Relevant jurisdictions have established ARRs to use instead of LIBOR.
How might a company be exposed to LIBOR?
There are many ways in which a company may be exposed to LIBOR. For example, LIBOR may be used in bank loans to companies, or in contracts between non-financial companies that have arrangements for payments which add interest.
In considering the extent of a company’s exposure to LIBOR, questions directors can ask include:
- Does LIBOR affect the company’s financial contracts and investment holdings?
- Is LIBOR used as (or as a part of) discount rates in valuation and risk models?
- Does the company use LIBOR in accounting methodologies and tax treatments?
- Does the company use LIBOR in non-financial contracts and disclosure documents?
What should company directors do?
1. Consider appropriate transition steps
Once the nature and scope of the company’s exposure to LIBOR has been identified, the company should consider the dynamics of transitioning from LIBOR to ARRs. Some useful questions include:
- Does the company have contracts containing ‘fallback’ provisions that specify what will happen if LIBOR is no longer available? Fallbacks may cover a temporary or permanent interruption.
- How long will it take for various parts of the company to implement the necessary changes to ensure a smooth transition?
- Can the company manage LIBOR transition internally, or will it require external assistance?
- Are there enough resources to manage the transition?
2. Engage early with relevant external stakeholders
Companies should engage early with their banks and any other financial service providers to understand how the LIBOR transition plans of those financial service providers will impact the company.
Many large financial institutions have established outreach and communication programs for clients to help clients understand the differences between products that utilise LIBOR from those that do not utilise that interest rate benchmark.
Companies should also engage early with their own clients around the transition from LIBOR. This can assist in mitigating any unnecessary legal, financial and litigation risks.
3. For more information
Visit the Financial Benchmarks section of ASIC’s website for updates on the transition from LIBOR to ARRs in Australia.