Frequently Asked Questions
Upcoming changes to LIBOR based Reference Rates
AMP Capital is providing this information to inform you as to the upcoming market transition from traditional LIBOR based reference rates to new alternative reference rates (ARRs). We will update this commentary for changes as they occur and/or are relevant to the transition process.
What is LIBOR?
The London Interbank Offered Rate (LIBOR) is calculated from market trades and “expert opinions” via submission from a panel of banks and is intended to reflect the unsecured rates they will borrow and lend to each other. Many investment funds purchase and hold securities linked to LIBOR that contribute to the fund valuation and returns.
Why is there a change coming?
Regulators want to promote greater transparency, measurability and increase the integrity of interest rate benchmarks by phasing in new central bank-administered interest rate benchmarks that are based on actual transactions.
In 2017 the UK Financial Conduct Authority (FCA) determined that after December 2021 banks would no longer be compelled to submit quotes to facilitate the calculation of LIBOR. In a March 2021 update, the FCA, in conjunction with LIBOR’s administrator, ICE Benchmark Administration (IBA) confirmed:
- all CHF and EUR LIBOR settings, the Spot Next, 1-week, 2-month and 12-month JPY LIBORnsettings, the overnight, 1-week, 2-month and 12- month GBP LIBOR settings and 1-week and 2-month USD LIBOR will permanently cease at the end of December 2021.
- Overnight and 12-month USD LIBOR will continue until end June 2023 to allow harder to transition products more time to change to SOFR references.
The FCA will consult on requiring IBA to continue publishing 1-month, 3-month and 6-month JPY, GBP and USD LIBOR settings on a synthetic basis for further periods.
What are the new Alternative Reference Rates (ARR’s)?
|USA - USD||USD
LIBOR to SOFR
|SOFR is administered by the Federal Reserve Bank of New York|
|UK - GBD||LIBOR
|SONIA is administered by the Bank of England|
|EURO||EONIA to €STR||€STR is administered by the European Central Bank|
|Swiss - CHF||CHF LIBOR to SARON||SARON is administered by the SIX Swiss Exchange|
|Japan -JPY||JPY LIBOR to TONA||TONA is administered by the Bank of Japan|
What is different between LIBOR and an ARR?
- The new ARRs are all based on real transactions.
- Compared to the term structure (1 week to 12 months) of LIBOR rates, ARRs are overnight only.
- ARRs effectively remove the credit component by transacting overnight with central banks.
- LIBOR was set in advance, ARR’s are not known until the end of the term.
When is it happening?
- The LIBOR panel banks agreed to continue to submit to LIBOR until end-2021 (subsequently extended to end-June 2023 for US dollar LIBOR only), to enable time for the market to transition away from LIBOR. (source: www.fca.org.uk as at 26/03/2021 https://www.fca.org.uk/markets/libor)
- Regulatory guidance and market best practice is that market participants should ensure new trades are in ARR’s as soon as possible and in any case by 31 December 2021. No new trading in LIBOR references products after this date.
- ISDA have released the IBOR Fallbacks Protocol to be used in their derivative documentation by financial market participants. The protocol went live on 25 January 2021 and for all adhering parties provides a market best practice alternative reference rate should the IBOR rate in question stop being quoted or become unrepresentative prior to its respective cessation date.
What is AMP Capital doing?
AMP Capital is progressing with the LIBOR transition, in accordance with our client-focussed and regulatory commitments.
The AMP Capital investment teams are actively monitoring developments in LIBOR and the new ARRs to ensure we take all appropriate steps regarding the transition.
We have in place appropriate governance and oversight processes to support an orderly transition away from the use of LIBOR throughout our business and will continue to provide you with updates on the progress we are making.
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