BSP wants banks to shift to alternate rates way ahead of LIBOR exit

Published September 16, 2021, 5:02 PM

by Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno is encouraging local banks to “proactively” transition all of its London Inter-Bank Offered Rate (LIBOR)-related exposures to alternate or replacement reference rates before it begins its cessation process in three months or in January 2022.

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LIBOR, the rate that banks in London offer Eurodollars in the placement market and a benchmark rate for global banks, will no longer be in use after December 31 this year, as announced by the United Kingdom’s Financial Conduct Authority (FCA) in 2017.

Diokno said banks should have the necessary systems and infrastructure, and are able to implement “appropriate contractual arrangements” before the LIBOR is phased out completely.

BSP encouraging timely shift to alternate rates to LIBOR

“Banks’ transition plans are expected to include strategies for actively reducing reliance on LIBOR sufficiently ahead of the discontinuation of the benchmark,” said Diokno during his weekly online press chat. “In any case, the BSP will continue to work with the banking industry to facilitate a smooth transition,” he said.

The BSP will leave it to the banks to choose their replacement rate but do it as soon possible since a delay or inability to shift to alternate rates will deprive banks and their clients of repricing and valuing their financial exposures once LIBOR ceases to exist by mid-2023.

“This would subject them to unknown risks,” said Diokno.

He also said that BSP will not dictate or prescribe specific alternative reference rates to LIBOR. “We view the choice to be market-driven,” said the BSP chief. “Based on continuing engagements with the market, Philippine banks intend to adopt the rates widely accepted in international markets as successors to LIBOR,” he noted.

In the meantime, the Alternative Reference Rates Committee organized by the US Federal Reserve Board and the Federal Reserve Bank of New York is promoting the Secured Overnight Financing Rate or the SOFR since July 2017 as replacement rate. The SOFR is based on actual transactions in the US Treasury repurchase market.

“The rate is seen as the best replacement for US dollar LIBOR since it is transaction based, and is deep, broad and diverse enough to not dry up in times of market stress. There have also been efforts to develop SOFR Term Rates to meet the needs of the cash market,” said Diokno.

LIBOR, as early as 2017, has been announced to be winding down. The allegations of LIBOR manipulation since 2005 has led to investigations on panel banks and in 2012, British giant Barclays Bank was the first to admit of LIBOR manipulation.

BSP encouraging timely shift to alternate rates to LIBOR

In March of this year, the FCA said the timeline starts with the cessation of 1-week and 2-month US dollar LIBOR and most tenors of other currency LIBOR by end-2021. The process of cessation will start in January, 2022. By July 2023, there will be a “loss of representatives of all remaining LIBOR”.

Last November 2020, the BSP issued a memo on local banks’ transition from the LIBOR and the guidelines on the reporting requirements on LIBOR-related exposures.

The memo wants banks to ensure operational readiness for adopting replacement rates and to submit quarterly reports on their LIBOR-related exposures to the BSP to properly identify these crucial transactions and monitor how banks are handling the transition.

LIBOR is used by local banks as a reference rate for its foreign currency-denominated transactions such as corporate and consumer loans, bank deposits, fixed income securities, interest rate swaps and cross currency swaps.

“The cessation of LIBOR will affect not only products that are directly referenced to LIBOR (but also) the Philippine Interbank Reference Rate or PHIREF (which) is computed using US dollar LIBOR,” said Diokno. PHIREF in its current form will be discontinued when LIBOR is terminated.