LIBOR Replacement and the way forward

The implications of replacing LIBOR and a step-by-step guide to a smooth transition to alternative reference rates (ARRs).

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Why and when will IBORs be replaced?

The impacts of LIBOR replacement and a step-by-step guide for smooth transmission to Alternative Reference Rates (ARRs).

Allegations of LIBOR manipulation started back in the 1990s or probably even earlier, which resulted in the imposition of fines on participating banks and a subsequent lack of confidence in the accuracy of LIBOR. However, on the back of the 2011 ‘LIBOR scandal’, the Financial Stability Board (FSB) recommended in 2014 to replace various IBORs with Alternative Reference Rates (ARRs) or as termed by some market participants ‘Risk Free Rates’ (RFRs). Subsequently, worldwide financial regulators actively started to introduce ARRs and provided guidelines for a smooth transition.

For instance the Financial Conduct Authority (FCA), the UK regulator, formally announced in 2021 (after its initial announcement in 2017) that all LIBOR settings for EUR, CHF, GBP, and JPY as well as the 1-week and 2-month LIBOR settings for USD will cease or no longer be representative after 31 December 2021. The remaining USD LIBOR reference rates will cease to exist after 30 June 2023. Based on recommendations in 2018 by the working group for the Euro Overnight Index Average (EONIA) and the Euro Interbank Offered Rate (EURIBOR), the European Central Bank (ECB) published the first Euro short-term rate (€STR) as an ARR for EONIA and EURIBOR on 2 October 2019. The ECB has already announced to discontinue EONIA on 3 January 2022. However, the EURIBOR will continue along with €STR after 3 January 2022.

The ECB recommends to use €STR as the primary rate but has not announced yet when EURIBOR will cease to exist.

Why do Treasures care?

IBORs are the standard reference benchmarks for millions of contracts worldwide. According to an estimate by Bloomberg, the estimated market value of the underlying contracts is over USD 370 trillion. Discontinuation of IBORs will impact almost every Treasury transaction of your organization regardless whether it is lending (deposits), borrowing (loans), investing (bonds) or a hedging (derivatives) transaction.

Implementation of ARRs will have an impact on the valuation of your existing transactions and pricing of new transactions. Changes in benchmarks will further change interest calculations, resulting cash flows and settlement dates. Changes in interest calculation methods might have impacts on your taxation as there could be changes to your debt instrument value. Resulting changes in accounting methods used for ARRs pose another challenge. In addition to financial impacts, your system infrastructure will be affected due to the required implementation of ARRs.

What should Treasurers do?

#01: Familiarize yourself with ARRs and related events especially fallback provisions of existing contracts


Fallback provision:

The ECB defines ‘fallback provision’ as clauses in a contract that determine what rate parties should use in the event that the agreed upon benchmark rate like IBORs are not available.

Here is the list of major ARRs replacing current benchmarks along with their cessation deadlines:

CurrencyCurrent benchmarkARRARR PublisherTermination deadlines
EUREONIA€STREuropean Central Bank03.01.2022
EUREURIBOR€STREuropean Central BankNot yet announced
EUREUR LIBOR€STREuropean Central Bank31.12.2021
CHFCHF LIBORSARONSIX Swiss Exchange AG31.12.2021
GBPGBP LIBORSONIABank of England31.12.2021
USDUSD LIBORSOFRUS Federal Reserve Bank31.12.2021*
JPYJPY LIBORTONARBank of Japan31.12.2021

*Only for 1-week and 2-month, the rest of USD LIBOR settings will be changed after 06/30/2023.

#02: Plan and prepare for the transition to ARRs.

Plan early to be prepared when IBORs are no longer available. Also note: The new instrument contracts issued are already quoted with ARRs.

#03: Identify your IBOR-based engagement and relevant transactions

Identify the number of transactions, the total value of the transactions, the currencies of the transactions, the type of transactions, the counterparties involved, and the fallback clauses involved.

#04: Talk to your financial business partners and, if possible, negotiate existing contracts

Once exposure is identified, speak with relevant financial partners, including banks and/or counterparties, to coordinate their post-IBOR plans and schedules with yours.

#05: Update your system landscape

Update your treasury management system (TMS) to support ARRs. Consult with your TMS vendor, as well as market data vendors, to understand what needs to be done to implement the required changes, expected timeline, and cost of implementation. Please note that some regulators require firms to be fully operational by December 31, 2021. The Swiss Financial Market Supervisory Authority (FINMA) requires “full operational readiness” in its December 2020 notice. Accordingly, all relevant systems and processes should already be able to function without dependence on LIBOR.”

SAP system adaptation

There is already a large number of SAP updates available for the new interest calculation methods for money market transactions and bonds. Even the new feature to include/exclude the spread into the compounding has been added to the solution. Updates for ABS/MBS and Sinking Bonds are not yet available and are expected around Q3 2021.

While the number of impacted instruments may not be large for some companies in 2021, ARRs are the new future convention and USD-LIBORs will follow in 2023. The above five steps should help your organization to understand and manage a smooth transition to ARRs.

We have already accompanied and consulted various clients regarding their IBORs replacement journey and are happy to help your organization.

Christian über Automatisierung im Treasury mit Künstlicher Intelligenz
Christian Million, Managing Partner von Convista und Verantwortlicher für den Bereich Treasury

Any questions?:

Feel free to contact us!

We have already accompanied various customers on their way to replacing the IBOR and are pleased to be able to help your company as well.

Your contact person: Christian Million

Contact us now

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