BMO has established the IBOR Transition Office to lead and coordinate transition efforts for the bank and to ensure efficiency and a positive client experience. While the breadth of the change is wide-reaching, by working in collaboration with our clients, BMO expects that we will be able to successfully move forward together.
What is IBOR/LIBOR?
Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), are the rates at which banks can borrow in the interbank market on an unsecured basis. LIBOR is the most widely-used and well-known interest rate benchmark, and is calculated based on submissions from individual panel banks. LIBOR is published daily in five currencies (British Pound Sterling (GBP), U.S. Dollar (USD), Euro (EUR), Swiss Franc (CHF) and Japanese Yen (JPY)) and seven maturities (overnight, one week, one month, two months, three months, six months, and one year). Other IBORs impacted by the transition include: the Tokyo Interbank Offered Rate (TIBOR), the EUR Interbank Offered Rate (EURIBOR), and the Canadian Dollar Offered Rate (CDOR).
Why is LIBOR Going Away?
LIBOR’s sustainability and integrity have increasingly been called into question for two reasons: (1) a decline in the interbank unsecured funding market has led to a lack of actual transaction data upon which to calculate the rates; and (2) the ease with which it has been manipulated, most notably during the 2012 LIBOR scandals, has led to a deterioration of the confidence in the rate setting process. The UK Financial Conduct Authority announced in July 2017 it would no longer compel banks to contribute to LIBOR after December 31, 2021.
What’s Next? Alternative Reference Rates
Regulators and global industry working groups have spent the last few years focused on identifying Alternative Reference Rates (ARRs) derived from transactional data to serve as eventual IBOR replacements. Jurisdictions around the globe have since selected ARRs based on transactions in overnight funding markets. The following rates have been selected for each jurisdiction:
United States: SOFR
United Kingdom: SONIA
Canada: Enhanced CORRA
Firm’s will face significant operational and infrastructure updates, including technology, risk modeling, underlying legal documentation, volume of legacy contracts, hedging implications, and possible accounting issues. BMO has established the IBOR Transition Office to ensure all areas of BMO are prepared for the transition and BMO’s clients are equipped for the industry and regulatory changes to come.
What Firms Should Start Thinking About
Despite industry efforts to guide market participants in this transition, individual firms will need to make their own plans for the transition. Key areas impacted by the transition include project governance/ management, exposure and impact analysis, risk management, contractual remediation and infrastructure/ technology readiness.
The content of this webpage reflects BMO’s current understanding of the IBOR Transition and is for informational purposes only. This information does not constitute and shall not be construed to constitute legal, financial, tax, accounting, or regulatory advice by BMO or its affiliates. BMO makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change.
The BMO IBOR Transition Newsletters are sent out monthly to clients. The purpose of this newsletter is to provide the latest updates and industry developments regarding the transition from IBORs to alternative nearly risk-free rates (RFRs). The newsletter provides summarized jurisdictional highlights from the global regulatory community, industry working groups, and various industry news sources. If you would like to receive these monthly newsletters please email IBOR.TransitionOffice@bmo.com to be added to the distribution list.
August 2020 Newsletter
July 2020 Newsletter
June 2020 Newsletter
May 2020 Newsletter
April 2020 Newsletter
March 2020 Newsletter
February 2020 Newsletter
January 2020 Newsletter
BMO has prepared numerous educational and informational materials tailored to specific aspects of the transition which can be found below.
The LIBORious Transition to SOFR
An initial summary of the IBOR transition, with a specific focus on the transition from USD LIBOR to SOFR.
IBOR Transition Overview
The IBOR Transition Overview is a high level summary of the IBOR transition at BMO. This document covers background information, SOFR data, transition challenges, fallback language and BMO’s approach to tackling this transition.
Introduction to SONIA and €STR
The Introduction to SONIA and €STR takes a deep dive into all information related to the new ARRs in the UK and Europe. This document covers SOFR Issuance, comparing SOFR to LIBOR, and SOFR deal mechanics.
The SOFR 101 takes a deep dive into all information related to SOFR. This document covers SOFR Issuance, comparing SOFR to LIBOR, and SOFR deal mechanics.
The IBOR Fallbacks covers the extensive contract remediation that is related to the transition from IBORs to ARRs. This document covers a summary to fallbacks, the ISDA 2020 IBOR Fallbacks Protocol, and next steps for contract remediation.
In addition to the above materials, BMO continues to develop additional informational and educational items around this transition. For information on the various resources available please reach out to your BMO contact or the IBOR Transition Office (IBOR.Transitionoffice@bmo.com).
Industry groups have been established globally to assist market participants in the transition away from IBORs. The below are industry groups that have been established in different jurisdictions.
International Swaps and Derivatives Association (ISDA)
ISDA has published a central hub on its website with information on the transition from LIBOR and the adoption of alternative risk-free rates. This hub features updates on ISDA’s work on fallbacks and other benchmark initiatives, as well as research and analysis. The benchmarks hub serves as a one-stop shop for information from ISDA on benchmark reform.
Working Group on Sterling Risk-Free Reference Rates
The overall objective of the Working Group is to accelerate a broad-based transition to SONIA by end-2021 across sterling bond, loan and derivative markets, in order to reduce the financial stability risks arising from widespread reliance on LIBOR. The Working Group recommended the Sterling Overnight Indexed Average (SONIA) as the preferred sterling risk-free rate as it has capability to evolve over time, tends to be predictable and tracks Bank Rates closely. SONIA is already referenced in the sterling OIS market, making the transition easier. It measures the rate paid by banks on overnight funds and is calculated as a trimmed mean of rates paid on overnight unsecured wholesale funds.
Alternative Reference Rate Committee (ARRC)
The ARRC was convened in 2014 by the Federal Reserve to identify alternative reference rates to replace USD LIBOR and recommended the Secured Overnight Financing Rate (SOFR) as it preferred alternative rate. SOFR is an overnight, secured referenced rate administered by the Federal Reserve Bank of New York that broadly measures the cost of overnight borrowing with U.S. Treasuries as collateral. It is firmly based on transaction data and is calculated as a volume-weighted median of tri-party repo transactions.
Working group on Euro Risk-Free Rates
The European Central Bank (ECB), the Belgian Financial Services and Markets Authority (FSMA), the European Securities and Markets Authority (ESMA) and the European Commission launched a private sector working group on euro risk-free rates. The working group was tasked with identifying an alternative RFR to serve as a basis for an alternative to the current benchmarks used in a variety of financial instruments and contracts in the Euro area. The Working Group recommended €STR as its preferred nearly risk-free rate for the Euro area.
National Working Group on Swiss Franc Reference Rates (NWG)
The NWG on CHF Reference Rate is the key forum to reform reference interest rates in Switzerland. The Working Group selected SARON, which is an overnight reference rate of the secured funding market for Swiss franc and is based on transactions and quotes posted in the Swiss repo market.
Canadian Alternative Reference Rate Working Group
The Canadian Alternative Reference Rate Working Group (CARR) was created to identify and seek to develop a new term risk-free Canadian dollar interest rate benchmark. CARR has decided to enhance an existing rate, the Canadian Overnight Repo Rate Average (CORRA).
Publication of revised 2006 ISDA Definitions and protocols with new IBOR fallback provisions
IASB is expected to publish guidance on hedge accounting treatment of loans, bonds, and derivatives
FSB to publish report on LIBOR transition progress
June 30, 2020
Hardwired fallbacks incorporated in FRNs, securitizations, and mortgages
June 30, 2020
FRN technology/ operations vendors to be ready to transact SOFR
July 31, 2020
Establish final recommended conventions for SOFR-based floating rate notes, business loans, and securitizations
September 30, 2020
Hardwired fallbacks to be incorporated in business loans and student loans
September 30, 2020
Target cessation for new applications for close-end residential mortgages using USD LIBOR and maturing after 2021
September 30, 2020
Business and consumer loans technology/ operations vendors to be ready to transact SOFR
SOFR-based Adjustable Rate Mortgages (ARMs) to be accepted beginning Q3 2020
October 16, 2020
LCH Limited and CME Group plan to move SOFR discounting on all USD denominated SwapClear contracts
Hardwired fallbacks incorporated in derivatives no later than 4 months after the amendments to ISDA 2006 Definitions are published
December 31, 2020
Target for cessation of new use of USD LIBOR for FRNs
December 31, 2020
Securitizations technology/ operations vendors to be ready to transact SOFR
January 01, 2021
GSEs will no longer purchase LIBOR-indexed ARMs
CCPs to no longer accept new swap contracts for clearing with EFFR as PAI and discounting
Term SOFR based on derivatives to be finalized
June 30, 2021
Target for cessation of new use of USD LIBOR for business loans, securitization and derivatives
September 30, 2021
Target for cessation of new use of USD LIBOR for CLOs
August 3, 2020
Bank of England to publish daily SONIA compounded index
End Q3 2020
UK Lenders should be in a position to offer non-LIBOR linked products to their customers
Forward looking term versions of SONIA to be available in the loan market
End Q1 2021
Cease all new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021
April 01, 2021
BoE will increase haircuts on LIBOR-linked pre-positioned collateral
December 31, 2021
FCA will no longer compel panel banks to submit LIBOR quotes
July 27, 2020
EU central counterparties (CCPs) have set discounting switch for cleared EUR denominated derivatives
December 31, 2021
EMMI to cease publication of EONIA rates
Key Dates updated as of September 17, 2020.
General Questions on IBORs and LIBOR
This document provides answers to some general questions on IBORs and LIBOR. Questions include: why and when LIBOR is going away, what are the new alternatives, and what industry work has been done to help in the transition away from LIBOR.
Questions on SOFR
This document provides answers to questions related to SOFR. Content includes: how SOFR is determined, the timeline for the transition, and a comparison between LIBOR and SOFR.
Questions on SONIA €STR and Enhanced CORRA
This document provides answers to questions related to SONIA, €STR and CORRA. Content includes: the difference between LIBOR and SONIA, and more information on €STR and CORRA.
Questions on Calculation Methodology
This document provides answers to questions related to the calculation methodologies. Content includes: credit spread adjustment, compound setting in arrears, lockouts, lookbacks and payment delays.
Questions on Contractual Fallback Language, LIBOR Cessation and the ISDA Protocol
This document provides answers to questions related fallback language, LIBOR cessation and the ISDA Protocol.
BMO is here as an informative resource around the IBOR transition and will periodically update this page as industry announcements and new developments occur.
For additional information and/or specific questions around the IBOR transition, please reach out to your BMO sales contact, relationship manager or the BMO IBOR Transition Office (IBOR.Transitionoffice@bmo.com).
The industry issuance provides detailed graphs on SOFR and SONIA issuance, SOFR and SONIA futures and weekly swap volumes.
This timeline depicts key upcoming milestones related to the IBOR Transition.
Additional information on the different RFRs in the UK, United States, Europe, Japan, Switzerland and Canada.