FAQ's Benchmark Reform & Reference Rates

A reference rate is an interest rate benchmark used to set other interest rates or to determine pay-offs in a financial contract and which is outside the control of the parties to the contract. Interest rate benchmarks are essential for the smooth functioning of the financial markets and are widely used by banks and other market participants. Various types of transactions use different interest rate benchmarks, but the most common was LIBOR and are EURIBOR, SIBOR, CDOR and WIBOR. Reference rates are used in many different contracts like floating rate notes, loans, swaps, short-term interest rate futures contracts and debt capital markets instruments, as well as homeowner mortgages.

Due to international agreements and European Benchmarks Regulation a number of well- known and widely used interest rate benchmark indices are reformed or expected to be discontinued and replaced with alternative, risk-free rates. This may have significant impact on client transactions.

Benchmark interest rates like LIBOR, EURIBOR and EONIA were originally based on interbank borrowing/lending transactions. Since the financial crisis of 2008 the liquidity in the interbank market has significantly decreased. This has raised concerns regarding the representativeness of the benchmarks whilst at the same time the volume of contracts dependent on these benchmarks (for example interest rate derivatives) has substantially grown. The way in which some benchmarks are established - through submissions from panel banks, which are often based on the (subjective) assessment of a trader in the absence of observable trades - is also a cause for concern. Therefore regulators and central banks have requested the financial industry to design and implement alternative, transaction-based risk-free reference rates to better and more robustly reflect market conditions. Benchmarks that are used in the EU need to comply with EU Benchmarks Regulation. The current EURIBOR benchmark has been made compliant in 2019. The EONIA benchmark was not compliant with this regulation and has been replaced with €STR.

LIBOR stands for London Inter-Bank Offered Rate and provides an indication of the average rate at which LIBOR panel banks could obtain wholesale, unsecured funding. The rate was calculated for 5 five different currencies (USD, GBP, EUR, CHF, JPY) and for different tenors ranging from overnight to 12 months. It was based on submissions from a panel of contributing banks and administrated by ICE Benchmark Administration (ICE BA) in London. LIBOR was used in retail and professional markets, amongst others for lending transactions, in floating rate bonds and in derivatives.

The Financial Conduct Authority (FCA), the regulator overseeing LIBOR, has publicly stated that it will no longer require banks to participate in the LIBOR panel after 31 December 2021. In addition, the ICE BA(i.e. the administrator of LIBOR) has announced to cease publication of all LIBOR settings as per December 31, 2021, except for USD LIBOR – overnight and 1, 3, 6 and 12 months settings, which stopped per June 30, 2023.

In the meantime, global regulators and the industry have been working together to facilitate the transition to alternatives of each of the affected LIBOR currencies (EUR, GBP, JPY, USD and CHF).

Several authorities and industry working groups have all identified recommended alternatives to the different LIBORs. For each of these LIBORs and the recommended alternative risk free rate, the transition is at different stages and continues to further evolve. The following risk free rates are considered as recommended alternatives for the different LIBORs:

Since LIBOR was a forward-looking rate that is available in a number of tenors, several industry working groups have been developing forward looking term rates:

If you had a LIBOR referencing contract with Rabobank, Rabobank has engaged with you to have this contract remediated and replaced/amended to reference a replacing Benchmark. For those contracts that could not be remediated the contract is further serviced by TermSOFR, increased with a 5 year Historical median CAS (synthetic Libor).

EURIBOR is an unsecured market benchmark rate calculated for several tenors(one week, and one, three, six and twelve months). It is administered by the European Money Markets Institute (EMMI).

In line with its obligation under the EU Benchmarks Regulation European Money Markets Institute (EMMI), the provider of EURIBOR, has strengthened the approach for the daily determination of EURIBOR. EMMI has obtained approval for this new EURIBOR calculation methodology from the relevant regulator and announced that it had completed the phase in of this new methodology. At the time of writing the industry expectation is that reformed EURIBOR will remain in place in the near term, a move away from EURIBOR could still occur somewhere in the future.

As mentioned above, the relevant regulator has authorized the continued use of EURIBOR, although with an updated calculation methodology. So, as opposed to many of the IBORs, the EURIBOR benchmarks will continue to exist for the foreseeable future, meaning that there is no immediate risk of a major disruption for contracts relying on EURIBOR fixings. Nonetheless, contracts should include robust fallback language to account for the eventuality that EURIBOR is discontinued in the future. Rabobank may reach out to you in due course if it considers that amendment of your contract should be preferable.

CDOR is based on a survey of the principal market-makers for Canadian dollar bankers' acceptances (currently, the six largest Canadian banks) who are asked to provide rates at which they would be willing to lend (offer) funds against primary BA market issuances to clients with existing credit facilities that reference CDOR plus a fee.

The cessation of CDOR has been announced and will stop being published end of June 2024. As of June 2023 no new CDOR derivatives are allowed (with exception for hedging purposes) and of 1 November 2023 no new CDOR referencing loans are allowed. For floating CAD loans 3 alternative reference rates are available, being Compounding CORRA, TermCORRA (available from September 5th 2023) and (Canadian) Prime rate.

If you have a contract referencing CDOR, Rabobank will contact you before June 2024 to remediate the contract to a CORRA based reference rate.

SGD SOR stand for Singapore Swap Offer Rate and is defined as the synthetic rate for deposits in SGD, which represents the effective cost of borrowing the SGD synthetically by borrowing USD for the same maturity, and swap out the USD in return for the SGD.

SIBOR stands for Singapore Inter Bank Offered Rate. An individual bank contributes the rate at which it could borrow funds in SGD (Singapore Dollar), were it to do so by asking for and accepting the interbank offers in reasonable market size.

WIBOR, is the WARSAW Interbank Offered Rate, which rate is quoted by 14 banks – money market dealers selected in the competition by the National Bank of Poland. Selection criterion is the share in the Polish cash instruments and derivative instruments market.

HIBOR, or Hong Kong InterBank Offered Rate, is the annualized rate charged for inter-bank lending on Hong Kong Dollar (HKD) denominated instruments, for a specified period ranging from overnight to one year.

In Singapore, SGD SOR is replaced by SORA (Singapore Overnight Rate Average) for derivatives and some cash market products. Also, SIBOR will be replaced by SORA. Publication of SIBOR will be discontinued by end-2024, however the instruction of the regulator is to have contracts be remediated by end June 2024.

WIBOR stands for Warsaw Interbank Offered Rate. In May 2022 the Polish Government announced its intention to replace WIBOR with a new benchmark.

In Hong Kong, HIBOR has been subject to reforms to enhance its transparency and robustness and may be subject to further reforms in the future. Reforms to HONIA (Hong Kong Dollar OverNight Index Average) as the alternative risk-free rate for HIBOR, to further strengthen its representativeness are currently being considered. Presently a multiple-rate approach is expected and HIBOR is expected to co-exist with HONIA.

If you had a contract referencing SOR, Rabobank has already engaged with you and remediated this to SORA.

If you have a contract referencing SIBOR, Rabobank will contact you before June 2024 to remediate the contract to the SORA reference rate.

Rabobank is monitoring the developments with regard to WIBOR, HIBOR and HONIA closely and will reach out to you in due course if we consider any amendments to your contracts referencing such rates to be appropriate or necessary.

LCH, Eurex and CME began using €STR to discount future cash flows and calculate interest payments on collateral, also known as Price Alignment Interest (PAI) as of 27 July 2020.

CME and LCH switched from the Effective Federal Funds Rate (EFFR) to SOFR on 16 October 2020. The same change has been applied to the PAI. To account for the economic impact, both CME and LCH have applied a combination of cash compensation and Fed Fund/SOFR Basis Swaps.

On the 23rd of October 2020, ISDA published its updated IBOR Fallback Supplement to the 2006 ISDA Definitions. The effective date of this Fallback Supplement was the 25th of January 2021. As from this date, all new derivatives referencing the 2006 ISDA definitions include the fallbacks as included in the Fallback Supplement.

The ISDA provides new triggers and fallbacks with respect to a range of relevant IBORs. Fallbacks will be triggered upon a cessation event (i.e. when an IBOR is permanently discontinued) or in the case of a pre-cessation event (i.e. when the relevant authority announces the rate is, or the future date where it will no longer be, representative. This future date is referred to as the ‘Index Cessation Effective Date’).

A fallback provision in a legal contract determines what reference rate parties will use in the event that the initially agreed upon reference rate is not available. Without a fallback to another reference rate, parties to a contract which references a certain reference rate might find themselves in dispute over action taken in response to the unavailability of the designated reference rate.

Fallback rates serve as insurance against the temporary or permanent cessation of a reference rate.

The industry working groups and other authorities have developed guidelines to draft standardized fallback language which might be included in new products and that specifically addresses LIBOR cessation. There are two main approaches used to draft fallback language: the hardwired approach and the amendment approach. ‘Hardwiring’ fallback language is a way of drafting fallback language to have pre-agreed aspects regarding the replacement reference rate and the process of how and when the loan will transition to the replacement reference rate. This is in contrast to fallback language using the “amendment approach” which only specifies that parties need to agree a replacement rate when certain triggers in the documents have occured.

Trigger Event – the event giving rise to the application of the fallback provision, or the future date from which the fallback will apply Fallback Rate – the new reference rate which will apply in that event

Spread adjustment – if the new fallback rate differs from the original reference rate, then it may be necessary to include a spread adjustment to minimize any transfer of value from one party to the other.

No, the changes are proposed by industry wide working groups on the recommendation of supervisors and central banks. More information and background can be found on the website of the Nederlandse Vereniging van Banken.

No, every contract that references an affected reference rate will be affected, whether this contract is entered into with Rabobank or another party.

Please refer to the following websites for more information on the benchmark transition: