LIBOR (and other IBORs) Transition

Important Information: The following explanation of the LIBOR (and other IBORs) Transition is provided for information purposes only. This information is not advice or a recommendation for any particular course of action, and no decisions should be made in respect of this information. No representations are made as to the information’s completeness, accuracy or suitability for any purpose. Recipients should take professional advice before taking any action.

Preparing for Transition from IBORs to Risk Free Rates

Interest rate benchmarks based on interbank offered rates (“IBORs”), the interest rates at which banks lend to and borrow from one another in the interbank market, are in the process of being reformed. There are a number of IBORs that are widely used in the financial markets including the London Interbank Offered Rate (“LIBOR”).

Public authorities, in both the UK and internationally, have been clear that LIBOR is expected to cease to exist after the end of 2021. Working groups have been set up in many different jurisdictions and alternative risk-free rates (RFRs) have been selected for all major currencies. RFRs are (near) risk-free rates calculated based on market transactions under the supervision of the relevant national regulator.

Frequently Asked Questions

1. What is IBOR Transition and why is it happening?

2. What is LIBOR?

3. Which IBORs are impacted and what are the replacement benchmarks?

A risk-free rate (RFR) is a (near) risk-free rate that is calculated based on actual market transactions under the supervision of the relevant national regulator. To date, these rates have all been overnight rates, some based on secured funding rates, some unsecured.

The transition to alternative risk-free rates has a number of benefits. Risk-free rates are transparent; they are based on real transactions (as opposed to submissions, as is the case with most IBORs at the moment); they are difficult to manipulate, and they form a reliable basis for all types of financial contracts which rely on a reference rate. They are also seen as a more appropriate benchmark rate because they do not already incorporate the credit risk premium which is embedded in interbank offered rates.

Working groups have been set up in many different jurisdictions and alternative reference rates (ARRs) have been selected for all major currencies.

Jurisdiction	IBOR	Working Group	Alternative Ref Rate	Rate Name	Administrator	Publication date	Description
United Kingdom	GBP LIBOR	Working Group on Sterling Risk-Free Reference Rates	SONIA	Sterling Overnight Index Average	Bank of England	Reformed 23/04/2018 Legacy 31/03/1997	Unsecured rate that covers overnight holesale deposit transactions
United States of America	USD LIBOR	Alternative Reference Rates Committee	SOFR	Secured Overnight Financing Rate	Federal Reserve Bank of New York	02/04/2018	Secured rate that covers multiple overnight repo market segments
Switzerland	CHF LIBOR	The National Working Group on CHF Reference Rates	SARON	Swiss Average Rate Overnight	SIX exchange	22/09/2009	Secured rate that reflects interest paid on interbank overnight repo
Japan	JPY LIBOR	Study Group on Risk-Free Reference Rates	TONAR	Tokyo Overnight Average Rate	Bank of Japan	30/12/1992	Unsecured rate that captures overnight call rate market
European Union	EONIA	Working Group on Risk-Free Reference Rates for the Euro Area	€STR	Euro Short Term Rate	European Central Bank	October 2019	Unsecured rate that captures overnight wholesale deposit transactions
European Union	EURIBOR		EURIBOR Unlike other IBORs, EURIBOR has been reformed to be compliant as a benchmark rate on an ongoing basis.

The latest Investment Association (IA) and Linklaters IBOR currency tracker shows the key jurisdictions and their IBOR transition approach and timeline.

If you have any questions about the RFR relevant to your jurisdiction please contact your usual Fidelity International contact or e-mail FIL RFR Queries

4. Who will be impacted by transition to RFR’s?

5. What are the key market challenges for IBOR transition?

6. What are the key risks?

IBOR benchmarks are used by several funds and fund managers as a reference rate for portfolio construction, agreeing terms with investors, for performance comparison purposes or potentially to calculate performance fees. For asset managers, the reform of major interest rate benchmarks (i.e. IBORs) will have widespread business implications.

The transition to RFRs may adversely affect the performance of a fund, mandates or products, its net asset value, earnings and potential returns to investors. Whilst many of these risks can be mitigated or minimised through the fund manager’s own transition programme, it is not possible to avoid them altogether.

Operation of a fund, mandate or product, may include execution of transactions in instruments that are valued using LIBOR or other, currency specific, IBOR rates. Additionally, contracts may be entered into which determine payment obligations by reference to IBORs.

If an IBOR is discontinued or otherwise unavailable, the rate of interest on instruments referencing the IBOR will have to be determined based on any applicable fallback provisions. These fallbacks may in certain circumstances be reliant upon the provision by reference banks of offered quotations for the IBOR rate (which may also no longer be available), or may be drafted in a way that inadvertently converts a floating-rate instrument into a fixed-rate instrument (e.g. where the fallback only contemplates a temporary interruption in the availability of LIBOR and requires the use of the last published LIBOR rate instead). Amending such fallbacks to make them work in a post-IBOR world requires the cooperation of third parties, with some bonds e.g. requiring the unanimous consent of all bondholders in order to amend the interest calculation methodology.

Positions in IBOR instruments may suffer from reduced liquidity and fall in value as a result of its planned discontinuation. Also, any substitute reference rate and any pricing adjustments imposed unilaterally, by a regulator or by counterparties, may not be suitable for a fund, resulting in costs incurred to close out positions and execute replacement trades.

7. How is Fidelity International responding to the move away from the IBOR benchmarks?

8. What is Fidelity International doing to mitigate the impact of any change for clients?

In preparation for the discontinuation of LIBOR, Fidelity International has developed a transition plan which addresses the fundamental impacts noted above: instruments, benchmarks and indirect dependencies.

Fidelity International is:

evaluating existing IBOR-linked exposures to understand the potential risks to client portfolios;
identifying applicable referenced benchmarks in Fidelity International -issued products/funds and potential replacement indices;
reviewing fallback language of existing investments/contracts in order to identify the appropriate action (if necessary) to be taken.

Fidelity International has developed action plans to deliver phased replacement instrument capability which will enable transition of instruments within funds when opportunities arise. This will enable Fidelity International to proactively migrate legacy reference rates to risk-free rates. Fidelity International has also taken the opportunity to enhance processes and systems capabilities.

Whilst the industry continues to work on the issues around managing legacy instruments ahead of the expected discontinuation of LIBOR, migration to new instruments using the new rates is expected to be driven by market conditions. Resulting from early engagement with vendors, industry groups and regulators, Fidelity International’s delivery of enhanced functionality has seen funds already investing in RFR-based instruments, such as:

RFR-based interest rate swaps as an alternative to LIBOR;
RFR-based floating rate cash instruments.

Investment-decision making continues to be done on an investment risk basis, taking into account items such as: relevant value, current liquidity, presence of fallback language etc. However, as a result of the previously mentioned functionality being delivered, Fidelity International can provide comfort that the new conventions and methodologies FIL can provide comfort that, the new conventions and methodologies will not be determining factors in the management of your investments.

With regards to reference benchmarks in funds/products, any proposed changes will be communicated and agreed well in advance. Where relevant, Fidelity International will be in touch with you with further details as the transition process continues as required.