LIBOR Transition Customer Frequently Asked Questions

On 5 March 2021, the Financial Conduct Authority (FCA) announced all LIBOR settings will either cease to be published or will be considered no longer representative. The FCA is the regulator of the administrator of LIBOR (ICE Benchmark Administrator (IBA)).

The following LIBOR settings will permanently cease to be published on the cessation date set out in the table below.

For the remaining LIBOR settings (1M, 3M and 6M in USD, GBP and JPY), the FCA announced these will no longer be considered representative of the underlying market and representativeness will not be restored from the dates set out below.

November 2021 Update

The FCA has announced that it will compel the continued publication of sterling and Japanese yen LIBOR settings for a limited time period after end-2021, using a 'synthetic' methodology (which as noted above, is not representative of the interbank funding market). This is currently proposed to only be permitted for use in certain legacy contracts and to be published only until the end of 2022 for JPY, with ongoing publication for GBP to be reviewed during 2022. As at the date of these FAQs, the FCA was still consulting on the specific contracts that will be entitled to use ‘synthetic’ LIBOR. More detail on this is set out below. For completeness, there is no current proposal from the FCA to compel the LIBOR administrator to publish EUR, CHF or USD LIBOR on a ‘synthetic’ basis.

All 35 LIBOR settings will either cease to be published by the LIBOR administrator or no longer be representative immediately after the dates set out above. This means there will be a staggered cessation of LIBOR rates.

LIBOR is published in five currencies – USD, GBP, JPY, EUR and CHF. For each currency impacted by LIBOR cessation, national public authorities and private sector working groups have identified an alternative overnight risk-free rate (RFR) which can be used as an alternative benchmark for the existing interbank offered rate. These are intended to replace LIBOR for most financial instruments denominated in those currencies^disclaimer. The identified RFR for each of the LIBOR currencies is set out in the table below:

Although the market is moving towards using RFRs in loans, derivatives and bonds, a RFR-based rate may not be appropriate for you in every circumstance. You may wish to consider alternative solutions and options that are more suitable to your specific objectives and needs. For example, you could consider a move to a fixed interest rate, or potentially an ANZ reference rate (or similar). ANZ is happy to discuss potential alternative rates with you.

ANZ expects most Trade & Supply Chain products to transition to Term RFRs rather than overnight RFRs due to the interest in advance/discounting nature of these products. Refer to Will ANZ be offering a Term RFR for loans? and the Trade and supply chain finance section for more detail.

AUD BBSW and NZD BKBM are still expected to continue to operate in the same way they currently do. Australia and New Zealand will operate in multi-rate environments.

The Reserve Bank of Australia (RBA) confirmed in a keynote address at the International Swaps and Derivatives Association (ISDA) Benchmarks Strategies Symposium in March 2021, that BBSW remains robust in the Australian market. In the same address, the RBA reminded the audience that 1-month BBSW is less liquid than other settings and users of 1-month BBSW should consider using alternative benchmarks due to the lack of liquidity in this market.

There are legislative solutions relating to benchmark transition being considered in the UK, the European Union and in the United States. In the UK, a Financial Services Bill was introduced into the UK Parliament in October 2020. The purpose of the UK Financial Services Bill included reducing uncertainty for ‘tough legacy’ contracts by enhancing the powers of the FCA to address benchmark transition issues. ‘Tough legacy’ contracts and instruments are those that do not contain fallbacks or contain inappropriate fallbacks and cannot practically be transitioned away from a LIBOR rate by amendment. The FCA has now exercised certain powers under this legislation. These are discussed in more detail below.

In the European Union, amendments have been made to the EU Benchmarks Regulation to enable the European Commission to designate statutory successors to affected benchmark rates for contracts with no or no suitable fallback provisions.

In the US, bills for New York-specific legislation were introduced in January 2021 into the New York state legislature and signed into law on 7 April 2021. The legislation is aimed at minimising legal uncertainty and potential economic impacts on LIBOR cessation. The legislation addresses those contracts without effective fallbacks that are written under New York law. The potential for US federal legislation is also under discussion in US Congress. Similar legislation is currently proposed to be passed federally.

The extraterritorial reach of each of the legislative solutions (as proposed or passed) in the UK, European Union and the US needs to be considered individually and specifically as they are limited by the powers of each of the legislative bodies making the laws. While they may be useful in certain circumstances, the legislative fixes may not provide a universal solution.

The FCA announced it will consult in Q2 2021 on the continued publication on a ‘synthetic’ basis for certain GBP and JPY LIBOR settings. The proposed settings for ‘synthetic’ LIBOR are set out in the table below.

The FCA has said it will continue to consider the case for requiring continued publication of US dollar 1M, 3M and 6M LIBOR settings on a ‘synthetic’ basis. No decision has been made yet for a synthetic USD LIBOR.

Publication of ‘synthetic’ rates is intended to protect consumer and market integrity, in particular in circumstances where it is unlikely to be feasible to convert certain legacy contracts to alternative reference rates (e.g. as described in Are any legislative solutions being considered?). Any ‘synthetic’ rates that are published would not necessarily be representative of underlying markets or economic reality. There is no guarantee the FCA will compel IBA to publish a ‘synthetic’ LIBOR rate beyond the official cessation dates or at all.

‘Synthetic’ LIBOR cannot be relied upon to transition legacy contracts.

November 2021 Update

The FCA has announced that it will compel the continued publication of sterling and Japanese yen LIBOR settings for a limited time period after end-2021, using a 'synthetic' methodology (which as noted above, is not representative).

What is Synthetic LIBOR?

The FCA has also confirmed that the methodology that will be used for ‘synthetic’ LIBOR is

• forward-looking term versions of the relevant risk-free rate (i.e. the ICE Term SONIA Reference Rates provided by ICE Benchmark Administration for sterling, and the Tokyo Term Risk Free Rates (TORF) provided by QUICK Benchmarks Inc., adjusted to be on a 360 day count basis, for Japanese yen), plus
• the respective ISDA fixed spread adjustment (that is published for the purpose of ISDA’s IBOR Fallbacks for the 6 LIBOR settings) – see Did the FCA announcement fix ISDA’s spread adjustment?: below for further details.

How long will Synthetic LIBOR be published for?

The current position is that ‘synthetic’ LIBOR will only be published until the end of 2022 in the case of JPY LIBOR, and ongoing use of the power to compel IBA to continue publication of GBP LIBOR will be reviewed by the FCA during 2022.

Which contracts are eligible to use Synthetic LIBOR?

Synthetic LIBOR is permitted for use in legacy contracts other than cleared derivatives, that have not been changed at or ahead of 31 December 2021. The use of Synthetic LIBOR is not permitted in any new contracts.

ANZ will not support the use of Synthetic LIBOR in any new contracts.

What about other currencies?

There is no current proposal to publish EUR, CHF or USD LIBOR on a "synthetic" basis.

On 5 March 2021, the FCA announced the dates on which panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available. ISDA confirmed this FCA announcement to be an “Index Cessation Event” under fallbacks introduced by Supplement 70 to the 2006 ISDA Definitions. However, the FCA announcement did not immediately trigger the LIBOR fallbacks to come into effect. The LIBOR fallbacks will apply from the Index Cessation Effective Date which in respect of a LIBOR setting will be the date on which such LIBOR setting ceases to be published or becomes non-representative.

The Alternative Reference Rates Committee (ARRC) confirmed the 5 March 2021 announcement by FCA constituted a “Benchmark Transition Event” for all USD LIBOR settings under the ARRC recommended fallback language for new issuances or originations of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans.

A “Benchmark Transition Event” is a public statement by the IBA (as the LIBOR administrator) stating LIBOR settings will cease to be provided by it and are considered no longer representative. The occurrence of a Benchmark Transition Event does not require an immediate transition under the ARRC recommended fallback language. Actual transition is based on the “Benchmark Replacement Date”. For USD LIBOR settings, this is (i) 31 December 2021 for 1W and 2M USD LIBOR and (ii) 30 June 2023 for all other USD LIBOR settings.

The FCA cessation announcement also triggered the fixing of the spread adjustment applicable to ISDA’s IBOR fallbacks (introduced through the recent ISDA IBOR Fallbacks Protocol and Supplement 70 to the 2006 ISDA Definitions). The ISDA spread adjustment is now fixed and will not change going forward. Details of the spread adjustment applicable to the 35 LIBOR settings are contained in a statement by Bloomberg Index Services Limited (BISL).

The benchmark rates for the currencies of Singapore, Thailand, India and the Philippines need to be replaced due to their dependency on USD LIBOR as an input. The scheduled cessation of USD LIBOR will materially impact the operation of these rates.

Each of the fallbacks for these Asian IBOR benchmark rates use ‘Adjusted SOFR’ compounded in arrears for the relevant setting (as published by BISL) together with a credit adjustment spread instead of USD LIBOR. The Asian IBOR benchmark fallback rates can only be used for legacy transactions/contracts as prescribed by the local authority. You can find more information about timing of the use of rates in different markets in When will LIBOR stop being used in new product issuances? Bloomberg will not be publishing Fallback SOR or Fallback THBFIX. These rates will be provided by ABS Administration Co Pte. Ltd. and the Bank of Thailand respectively.

Figure 1

The fallback and replacement rate for each of these Asian IBOR benchmarks are set out in Fig.1 above.

ANZ’s current understanding is that existing transactions referencing these Asian IBOR benchmarks can continue to do so until 30 June 2023. After 30 June 2023, their respective replacement rates will need to be used. This is subject to future guidance from the regulators or the applicable administrators for the continued use and construction of these benchmarks.

Although LIBOR rates are ceasing at the end of December 2021 (for non-USD) and June 2023 (for USD), their use in new product issuance must stop before then. Through the national working groups in each country (firmly supported by relevant regulatory agencies), recommended milestones have been published to inform market participants of when they should be ceasing new issuance of products referencing LIBOR. These milestone dates are different depending on the benchmark rate and product type. Fig.2 below provides a summary of these milestones. This table is current as at end of March 2021.

The milestones are subject to change and may also change without notice.

Figure 2. Summary of milestones

UK RFRWG – Working Group on Sterling Risk-Free Reference Rates

SC-STS – Steering Committee for SOR and SIBOR Transition to SORA

ARRC – Alternative Reference Rates Committee

CIC on JPY – Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

HKMA – Hong Kong Monetary Authority

BOT – Bank of Thailand

FCA – Financial Conduct Authority

US Fed – Board of Governors of the Federal Reserve System

FDIC – Federal Deposit Insurance Corporation

OCC – Office of the Comptroller of the Currency

JBATA – Japan Banker’s Association TIBOR Administration

On 30 November 2020, the Board of Governors of the Federal Reserve System (US Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) issued a statement to “encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by 31 December 2021”. Following the FCA cessation announcement, the ARRC reconfirmed their industry guidance to cease use of USD LIBOR in new bi-lateral business loans, securitizations and derivatives from end of June 2021.

November 2021 Update

On 20 October 2021, 6 US regulators announced that parties should not enter into new USD LIBOR contracts after 31 December 2021 other than in some very limited circumstances such as:

(i) transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure;

(ii) market making in support of client activity related to USD LIBOR transactions executed before January 1, 2022;

(iii) transactions that reduce or hedge the institution's or any client of the institution's USD LIBOR exposure on contracts entered into before January 1, 2022; and

(iv) novations of USD LIBOR transactions executed before January 1, 2022.

‘New contracts’ would include agreements that (i) creates an additional LIBOR exposure for a supervised institution or (ii) extends the term of an existing LIBOR contract. A draw on an existing agreement that is legally enforceable (e.g., a committed credit facility) would not be viewed as a new contract.

On 23 October 2020 ISDA published Supplement 70 to the 2006 ISDA Definitions (Supplement 70) and the ISDA 2020 IBOR Fallbacks Protocol. Supplement 70 amends the 2006 ISDA Definitions to add new robust contractual fallback provisions to certain ‘floating rate options’, including LIBOR based rates for transactions entered into from 25 January 2021. The ISDA Fallbacks Protocol, if adhered to by both parties, amends legacy transactions (entered into by adhering parties before 25 January 2021) to include the same fallbacks as contained in Supplement 70.

There has been widespread adoption of the ISDA IBOR Fallbacks Protocol. As of April 2021, there are approximately 14,000 adherents.

Yes. ANZ has adhered to the ISDA IBOR Fallbacks Protocol.

You can still adhere to the ISDA IBOR Fallbacks Protocol via the ISDA website. ANZ representatives will be reaching out to all non-adhering counterparties and customers who have derivative transactions with ANZ that are impacted by LIBOR Transition and extend beyond the relevant cessation date/date of non-representativeness to discuss their plans for those transactions. These discussions will likely include what amendments (if any) might need to be made to your existing derivative transactions if you decide not to adhere to the ISDA IBOR Fallbacks Protocol.

London Clearing House (LCH) has announced plans to conduct a ‘big bang’ transition of all cleared derivatives shortly before their LIBOR cessation dates. LCH is expected to run a conversion process in late 2021 for CHF/EUR/GBP/JPY LIBOR contracts. Any conversion process for USD LIBOR contracts is expected to occur at a later date.

LCH proposes to convert outstanding LIBOR contracts into corresponding RFR-based contracts where:

• LIBOR is replaced by the relevant compounded RFR plus a non-compounded spread adjustment in the LIBOR leg
• observation and payment dates in the LIBOR leg will follow the current market standard for the relevant RFR contract
• the non-LIBOR leg of the contract is left unchanged
• cash compensation is applied to neutralise any small residual valuation difference
• from an operational perspective, the process will involve termination of the LIBOR contract and re-booking as a RFR contract

The Chicago Mercantile Exchange (CME) is currently consulting on a similar conversion plan.

CSAs referencing EONIA as an interest rate for eligible EUR cash collateral will need to be amended as EONIA is ceasing at the end of 2021. These CSAs will need to be amended to replace EONIA with €STR. ANZ is in the process of amending CSAs to replace EONIA with €STR.

Market participants may also want to consider the impact of LIBOR Transition on USD derivatives. Currently ANZ’s CSAs reference Fed Funds for USD cash collateral. While US Fed Funds will continue to exist, market participants might want to consider the impact of SOFR replacing US Fed Funds as the main benchmark interest rate for USD cash collateral. ANZ does not currently propose to amend CSAs for any changes to the interest rate applicable to USD cash collateral for the time being. If this changes, ANZ will contact impacted counterparties.

Where there are LIBOR referencing derivative transactions covered by a master agreement not subject to the ISDA IBOR Fallbacks Protocol (such as transactions under the German DRV or the Chinese NAFMII agreements), these will need to be separately amended. Industry bodies are expected to provide guidance for how these transactions will be amended to add fallbacks. Any Global Master Repurchase Agreements that are not amended by adherence to the ISDA IBOR Fallbacks Protocol will need to be separately amended in order to make changes to the default interest rate.

You may have also entered into a non-derivative contract with ANZ such as bullion loan agreements which reference USD LIBOR as the default interest rate. These agreements will also need to be bilaterally amended to replace the default interest rate.

For any agreements needing separate amendment, ANZ will be in contact in due course about how these agreements can be amended.

For LIBOR referencing floating/floating cross currency swaps which incorporate the ISDA IBOR fallbacks, the non-USD LIBOR leg will automatically switch to reference RFR plus spread adjustment after 31 December 2021. The USD LIBOR leg will continue to reference USD LIBOR until 30 June 2023. Industry conventions remain uncertain for cross currency swaps. At this stage it is unclear whether industry has a preference to transition early to a RFR/RFR cross currency swap or use the ISDA IBOR fallbacks to transition one leg of the cross currency swap at a time.

November 2021 Update

To encourage the transition to RFR pricing in derivatives, industry working groups (supported by regulators) have proposed and implemented a phased approach known as “SOFR First”.  SOFR First is a phased initiative for switching trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for U.S. Dollar (USD) linear interest rate swaps (26 July ’21), cross currency swaps (21 September ’21), non-linear derivatives (8 November ’21) and exchange traded derivatives. These pricing convention changes have contributed to an uplift of SOFR based pricing in recent months.

Whilst adhering to the ISDA IBOR Fallbacks Protocol or incorporating Supplement 70 into the terms of derivatives transactions ensures these transactions have robust contractual fallbacks and will survive LIBOR cessation, you still need to consider the implications of actively transitioning your transactions from LIBOR to alternative rates. You should be aware if you are relying on fallbacks that you also should also consider the following now:

• At the time of LIBOR cessation, your LIBOR derivative transactions will switch to referencing a fallback rate instead of LIBOR. You should carefully consider how closely the fallback rate aligns to the rate you are intending to hedge
• When a fallback rate applies, payments under your LIBOR derivative transactions will be calculated using the “all-in fallback rate” published by BISL. Instead of being known at the beginning of an interest period, the amount of this payment using the “all-in fallback rate” will not be known until the end of the interest period
• How your systems will cope with the operational change to legacy derivative transactions. Systems may not automatically adjust to a new rate being available at the end of an interest period (rather than at the beginning of the interest period)
• Are there any valuation impacts to your legacy derivative transactions from the change in rate to the fallback rate? How will you risk manage the fallback rate? How will you manage your portfolio of new and legacy transactions referencing different interest rates?

There are various ways that RFR-based loans can be constructed. The most common approach ANZ has observed has been an "overnight in-arrears" structure, which is discussed in more detail below. Various "Term RFR" rates are also available for use for loans in certain currencies, and this is also set out below.

RFRs on an overnight basis

The key differences between LIBOR and RFRs include:

• Term structure and credit spread: A RFR-based loan is typically based on a daily published rate which does not include a term structure or a credit spread. The RFR is risk-free (or almost risk-free) and may be secured or unsecured. By contrast, a LIBOR-based loan uses a forward-looking unsecured term rate which incorporates a credit spread.
• Interest periods: LIBOR is published daily for a range of settings (for more information about settings see When will LIBOR cease?). RFRs are currently only available as an overnight rate.
• Different administrators: LIBOR is currently published by a single administrator (IBA) in respect of five currencies (USD, GBP, CHF, JPY and EUR). RFRs are published by administrator(s) in each jurisdiction for their currency only. Operational changes are typically needed to accommodate the different rate sources when using RFRs.
• Change in rate publication date and time: RFRs for any business day^disclaimer (in the relevant jurisdiction) are made available at a specified time on the next business day. By contrast, LIBOR is published daily for particular settings and is available before, or at the start of, the interest period for a LIBOR loan

These differences mean parties to a loan moving from LIBOR to RFR need to reconsider some of the key commercial conventions and terms applying to the loan for the calculation of interest.

While a daily observation of RFR could be used to calculate interest over any given period, this presents practical and operational complexities for both banks and customers. Instead, in the context of an overnight in-arrears structure, RFRs are averaged over the interest period. There are 2 main averaging methods used to calculate interest based on a RFR, either by:

• calculating a simple average interest rate over an interest period using daily RFR observations
• compounding the interest rate (on a cumulative or non-cumulative basis) over an interest period 

To be able to calculate a compounded interest rate using a RFR, there are different methods available in the market. The different compounded interest calculation methods are considered in more detail in How do RFRs work in transition?.

ANZ currently observes the non-US market favouring what is known as the “daily non-cumulative compounded rate in arrear” approach as recommended by the UK RFRWG. In general, this approach is aimed at balancing the time value of money with reduced operational complexity. ANZ currently observes the US market trending in a different direction. This is discussed in further detail below. ANZ also observes certain jurisdictions in Asia do seem to prefer the "cumulative compounded rate in arrear" approach, which can give rise to challenges relating to prepayments (and loan trading).

For loans with ANZ using ANZ Standard Terms and the ANZ letter of offer, ANZ currently expects to use the “daily non-cumulative compounded rate in arrear” approach as recommended by the UK RFRWG. If you wish to use a methodology which differs from this approach, you will need to bilaterally agree your loan terms with ANZ using a bilateral facility agreement.

Term RFRs

Term RFRs are (in summary) forward-looking terms rates derived from overnight RFR futures and/ or OIS swap markets. There are Term RFR Rates currently available for three currencies: USD (Term SOFR); GBP (Term SONIA); and JPY (TORF).

Unlike overnight “in arrears” RFRs, which are based on historic, actual values, Term RFRs are intended to reflect market expectations on the future movement in the RFR over an interest period.

Mechanically, Term RFRs in many ways resemble an IBOR rate. As is the case with an IBOR rate, a Term RFR rate is available at the start of an interest period, and is single rate that is determined in advance and applied for the whole interest period.

However, there are some key differences between Term RFRs and IBORs:

• Term RFRs do not contain a credit sensitive component and so economically resemble an RFR-based rate. Accordingly, Term RFRs also require a Credit Adjustment Spread (CAS) if used when transitioning away from LIBOR.
• Term RFRs are only available for some currencies (USD, JPY and GBP) but not others (EUR, CHF, SGD).
• Term RFRs have different use cases prescribed by regulators. At this time, Term RFRs for USD and JPY have been recommended for use in "business lending" (which includes the wholesale loan market) whereas the Term RFR for GBP has not;
• Term RFRs are not published on one source or screen (like LIBOR has been). Term RFRs for different currencies are available from different sources and published at different times;
• Term RFRs are only published for 1, 3 and 6 month tenors in the case of TORF and 1, 3, 6 and 12 month tenors in the case of Term SONIA and Term SOFR; and
• currently, outside of the US, Term RFRs lack market standards for other important considerations (e.g. the fallbacks that will apply, or how Term RFRs or the CAS will be calculated for interest periods where there is no published rate).

Some of the benefits of using a Term RFR are:

• familiarity with the mechanics of the rate; and
• a greater ability to forecast and manage cashflow and liquidity.

On the other hand, some of the potential disadvantages of adopting Term RFRs are:

• in the near term, there is a limited amount of market consensus and development on key issues
• in multi-currency arrangements, there may actually be increased complexity resulting from the use of Term RFRs. Overnight in-arrears methodologies are generally appropriate for all RFR currencies, while Term RFRs are not.
• Hedging Term RFRs could be more expensive than hedging overnight RFRs although this market is currently under development.

As set out in more detail below, ANZ is observing a high uptake of Term RFRs in the US, however growth in other jurisdictions currently appears to be lower.

For loans needing to be bilaterally negotiated or obtained through a syndicate or club, there are other key commercial considerations around loan terms and conventions needing to be considered such as:

• The key inputs into the relevant rate calculation such as applicable business day conventions, the length of the interest period, any adjustments to be made to the RFR, the compounding calculation methodology and the notice period for payment of interest
• The length of the “lag” (whether that is the Lookback Period or the Observation Shift) for the calculation of the interest amount payable and when the interest payment will be made
• Agreeing the CAS to manage the differential between LIBOR and RFR. We provide further detail on this in What is a Credit Adjustment Spread (CAS) in loans? 
• Ensuring the rate floor in the loan appropriately reflects the move from a rate based on LIBOR to a rate based on a RFR plus CAS
• If a rate switch structure is to be used, agreeing the relevant switch mechanics and backstop rate switch dates
• Consequential changes associated with the move to a RFR-based rate including:
  • revised fallbacks in the event the RFR is not available (such as, in the case of a Term RFR based loan, to overnight in arrears and then from an overnight RFR  to a central bank rates)
  • break costs and prepayment management
  • market disruption events

In addition, you should consider your overall financing arrangements (i.e. your loans, bonds and hedging) and the relationship between these different instruments. For example, compare the fallbacks in your loans with those in your hedges. This can be complex. You should seek independent accounting, tax and legal advice about the implications of this relationship for you as well as more generally about transition.

Although the development of consistent market conventions for loans has been slow, ANZ has more recently started to observe in non-US deals:

• Use of a “daily non-cumulative compounded rate in arrear” methodology. This methodology enables market participants to preserve the traditional flexibility found in a LIBOR loan such as charging interest for an interest period and accommodate intra-period events such as prepayments
• Use of a 5 business day Lookback (refer to the Glossary)
• Use of a non-Observation Shift methodology (although there remain some transactions where an Observation Shift is being considered or used) (refer to the Glossary)
• Use of central bank rates as the first fallback in the event the relevant RFR is unavailable. The way in which the central bank rate is adjusted is a point for commercial negotiation between the parties. For example, ANZ has observed parties adopting an averaging approach to adjust the central bank rate at the time a RFR becomes unavailable
• The operation of the rate floor in a loan generally following the UK RFRWG recommended position. That is, the floor applying to the sum of the base rate and the CAS. In the event the sum of the base rate and CAS is less than the floor (usually zero), the base rate adjusts to ensure that the aggregate of the base rate + CAS equates to the floor value

However, despite the above being the dominant approach being observed by ANZ outside the US, ANZ is also observing certain jurisdictions in Asia preferring  the "cumulative compounded rate in arrear" approach, which can give rise to challenges relating to prepayments (and loan trading). Now that the scope of use of Term RFRs is clearer, ANZ is also expecting to see some increase in volumes using available Term RFR Rates for loans (Term SOFR for USD and TORF for JPY).

The positions noted above reflect ANZ’s observations from recent non-US bilateral, syndicated and club loan deals. These terms are commercial matters you will need to agree with your lenders for bilateral, syndicated and club loans. The positions noted above may not necessarily reflect the commercial position that you wish to take. On the other hand, lenders may have a preferred commercial position on these terms and will also need to have regard to other considerations such as the operational risk and costs associated agreeing non-standard positions.

ANZ has observed a split between the approach taken to loan conventions in the US market and the approach taken in the rest of the world. In the US, the ARRC-recommended positions for syndicated, club and bilateral loans for USD denominated loans differ from the positions set out in Have market conventions for bilateral, syndicated and club loans been established yet? , in several key respects:

• The first fallback is generally the sum of: (a) “Term SOFR” and (b) adjustment specified in the ARRC-recommended language.
• If Term SOFR is not available, the second fallback is the sum of: (a) daily simple average SOFR (not a compounded rate) and (b) spread adjustment selected or recommended by the Relevant Governmental Body. Daily simple average SOFR involves the daily calculation of interest on the outstanding principal of the loan.
• The move to RFR-based rates requires a number of consequential issues be addressed by the parties. Under the ARRC-recommended language for syndicated and bilateral loans, the facility agent and the lenders (respectively) have rights to make various conforming changes to the facility document. Providing these kinds of rights to a facility agent reflects market practice in the US. ANZ does not expect this is to be widely followed outside the US market. Participants in markets outside the US will need to work through the consequential issues for moving to RFR-based rates between themselves.

You should also note the ARRC-recommended language for syndicated facilities does not generally deal with multicurrency scenarios. It is possible the methodology and other issues referred to in  How do RFR-based loans work? ,  What issues should you consider for RFR-based bilateral, syndicated and club loans? and Have market conventions for bilateral, syndicated and club loans been established yet? may need to be worked through by parties on a currency-by-currency basis in multicurrency facilities.

The move to RFR-based rates will be challenging for a number of customers. Ahead of transitioning to, or entering into, RFR-based loan products, you (and your operational systems) will need to be able to support RFR-based rates.

Whilst ANZ cannot provide you with any advice or recommendations, ANZ can support you to manage the transition of loan transactions by initially using LIBOR and including a pre-agreed RFR switching clause. The switching clause will apply on the occurrence of an agreed trigger event (being a specific date or some other trigger event). This is sometimes called a “hardwired fallback” or “rate-switch”. The terms for these switching arrangements can therefore be agreed upfront between the parties. If you are a customer on ANZ Standard Terms and the ANZ letter of offer, to incorporate “rate switch” mechanics, you will need to enter into bespoke (non-standard) bilateral documentation with ANZ to facilitate this.

The scope to use a rate-switch structure is now highly diminished. In relation to the LIBOR currencies, it is only available for USD and, even then, only until 31 December 2021.

Term RFRs are now available for use, depending on currency.

As noted above, there are Term RFR Rates currently available for three currencies: GBP (Term SONIA); USD (Term SOFR); and JPY (TORF).

Term SONIA is being published for certain settings by 2 vendors (refer When are Term RFRs coming? ). Term SONIA can only to be used in limited circumstances including trade and working capital, export finance and emerging markets transactions and for smaller corporate and retail clients. At this time, ANZ does not intend to offer Term SONIA for Institutional loan products with the exception of certain Trade and Supply Chain Finance products.

ANZ is able to offer Term RFR loan transactions using Term SOFR (for USD); and TORF (for JPY).

ANZ notes that, outside the US, the market standards for Term RFR transactions are continuing to develop. Key issues for the parties to address as part of any such transaction include:

• Fallbacks: The appropriate fallbacks (ANZ observes that a fallback to overnight rates is the dominant approach in the US (where Term RFRs are most widely used)).
• Non-standard periods: The approach for non-standard interest periods. In particular, how drawings which are shorter than one month are to be calculated is a mater to be considered. One approach for such periods is to interpolate between the overnight risk-free rate for the relevant currency and the one month Term RFR Rate. While this may intuitively seem the correct approach, ANZ also observes that RFRs (including Term RFRs) are not credit-sensitive rates, so there is no "yield curve" (or similar) which would underpin this approach. There is also the risk that the overnight RFR (which is typically more volatile than the Term RFR) may actually be higher than the Term RFR. ANZ has observed parties preferring the administrative ease of applying the one month Term RFR rate for a borrowing period of less than one month.
• Break costs: Term RFR-based loans typically attract "traditional" break costs, where overnight RFR-based rates are typically more focused on the finance parties being able to recover the administrative costs associated with processing early repayment.
• Hedging: Hedging Term RFRs could be more expensive than hedging overnight RFRs although this market is currently under development.

As you may recall from ANZ’s Customer Presentation pack dated May 2020, in order to mitigate potential economic value transfers on transition from LIBOR-based rates to RFR-based rates, a CAS needs to be agreed between the parties. Once agreed, CAS applies for the remaining life of the loan facility. The CAS will not reset at the beginning of each interest period.

The CAS is a key commercial matter for parties to a loan facility to consider and agree. As the spread between LIBOR and the RFR for each currency will be different, a different CAS will need to be agreed for each currency available to be drawn under a loan facility. The CAS will also be affected by the tenor of the interest rate period (i.e., there will be a different CAS agreed for 1M, 3M and 6M drawings) and will be different for different financial products (i.e. loans, bonds and swaps).

There is no single methodology that can be used to determine a CAS. ANZ has observed 2 key methodologies emerging:

• The 5-year historical median approach
• The forward approach (based on the forward looking swap market)

You can find more information about the key methodologies for determining CAS on the Bank of England website. Although explained on the website in the context of GBP, the information is equally relevant for other currencies.

Under the historical median approach, the CAS is computed using the median difference (spread) between GBP LIBOR and SONIA calculated over the previous 5 year period. This is the methodology applied by ISDA in the fallbacks contained in Supplement 70. Each of ISDA, FCA, UK RFR WG^disclaimer, ARRC, and the National Working Group on Swiss Franc Reference Rates have made various recommendations regarding the preferred approach (and have generally either recommended the 5-year historical median spread approach, or otherwise recognised it as an appropriate approach). In addition, on 25 March 2021, the ARRC included the 5-year historical median values in its Replacement Benchmark concept in the Supplemental Recommendations of Hardwired Fallback Language for Syndicated Loans and Bilateral Business Loans. In recent transactions, ANZ has more often observed the 5-year historical median approach.

As a result of the FCA announcement on 5 March 2021, the 5-year historical median as published by BISL is now fixed and available here. Refer to Did the FCA announcement fix ISDA’s spread adjustment? for more information.

Given its availability through various published information sources, the 5-year historical median approach offers greater transparency for both parties and given it is now a fixed value, simplifies operational processes. In addition, if you are looking to compare the offerings of different lenders, the use of these fixed values can help you make more straightforward like-for-like comparisons of the various lenders’ pricing.

By contrast, the forward approach fluctuates in real time (and could be higher or lower than the 5-year historical median setting at any point in time). The forward approach can also be affected by: (i) the time the CAS is set; and (ii) where the rate is sourced from.

The potential public sources to derive these values are limited, which can lead to lower transparency about how the applicable value is set. Because of this, the forward approach can also be more challenging to operationalise, is likely to require more complex and bespoke documentation and processes and may therefore lead to higher transaction costs. ANZ has observed that use of the forward approach is generally better suited to more highly structured transactions where a new related hedging transaction is to be entered into concurrently with the loan.

Given the greater transparency and its operational simplicity, ANZ’s preference is to use the 5-year historical median approach.

As noted above, the CAS is an additional pricing element intended to address the fact that RFRs operate in a different way to LIBOR. Although the CAS could be included in the margin, ANZ's view is that, for legacy transactions, the CAS should be separately identifiable and clearly documented. Further, the sole reason to add a CAS to a new RFR is to make the amended benchmark rate for a legacy loan comparable to the previous LIBOR benchmark for that loan and not provide an opportunity for either party to benefit from a value transfer.

ANZ is observing a varied approach to inclusion of the CAS in new/refinanced transactions. Some borrowers are preferring to maintain the CAS together with a comparable margin to what they have seen on previous transactions. Other borrowers are keen to do away with the CAS and incorporate a higher margin. For new transactions, ANZ is supportive of either approach but notes that borrowers will need to adjust to a change in margins for an RFR-based borrowing without a CAS.

LIBOR is published at the same time for each currency in the London market. RFRs, on the other hand, are managed on a national level for each currency. Without a central location from which to observe the screen rate, you will need to consider and manage a number of new issues.

Different timelines apply to LIBOR cessation for different currencies (refer When will LIBOR stop being used in new product issuances? ). You need to consider whether you plan to transition different currencies to their respective RFRs at different times, although it is noted that for most currencies, LIBOR is now (or will soon be) unavailable for new contracts.

Multicurrency facilities are particularly challenging for borrowers who draw down in multi-rate environments such as Australia, where AUD is priced off BBSY and other currencies are priced off RFRs. For example, you may have AUD-denominated facilities which are able to be drawn in GBP as an available currency. In this instance, you will need to manage a forward-looking rate for AUD draws (based on BBSY) and a RFR-based rate for GBP drawdowns (based on SONIA). An additional complication is the presence of Term RFR Rates.

There is no “one size fits all” solution.

Interest amounts for many T&SC products are calculated upfront such as where ANZ purchases a receivable at a discount to the face value of that receivable. Backward-looking RFRs are not suitable for products where the return is based on a discount rate. As a result, it is likely T&SC products where interest is calculated in advance or at a discount to face value need to be transitioned away from LIBOR to RFR using a Term RFR. Industry working groups have also recognised term rates (or their equivalent) are required for trade and working capital products.

There is a subset of Trade products where it may be possible to use backward-looking RFRs as a replacement for LIBOR. These include those products where interest is calculated in arrears such as in trade finance loans. However, the UK RFRWG has noted for customers for whom simplicity and/or payment certainty is a key requirement, they may still wish to consider using an alternative rate to RFRs (see If Term SOFR doesn’t come by the end of 2021 what happens?  for more information).

Yes.  For T&SC products ANZ is able to offer Term RFR products in most instances.  As set out below, there are Term RFR Rates currently available for three currencies: GBP (Term SONIA); USD (Term SOFR); and JPY (TORF).  For euro, T&SC will be using Euribor.

One point to highlight is that Term RFRs will not be published for all the same tenors as LIBOR is currently (the table below sets out the tenors for which the respective Term RFR will be published).  In particular, Term RFRs will not be published for 1 week or 2 month tenors, and in the case of TORF it will not be published for the 12 month tenor either.  ANZ’s standard position will for any drawings for non-standard periods will be to use the next available rate.  For TORF, as there is no twelve month rate any drawings requests for JPY for transactions any drawing requested for greater than 6 months will be priced by way of our cost of funds rate.

RFR Source Rates

There are currently 2 Term SONIA rate vendors (Refinitiv and IBA). The UK RFRWG has not recommended which Term SONIA rate market participants should use. Parties will need to choose which rate suits their documentation.

ANZ will be using Term SONIA published by Refinitiv in our standard T&SC products. Refinitiv Term SONIA Reference Rates are derived from SONIA OIS and published for 1-month, 3-month, 6-month and 12-month tenors. Term SONIA is published every London business day at 11:50am London time.

Based on information available now, existing trade facilities can continue to be drawn down until the cessation date, being 30 June 2023 for the relevant USD LIBOR setting. US regulators have stated that no new USD LIBOR referencing facilities should be entered into after 31 December 2021. ANZ will contact you to discuss relevant options for transition to RFR for USD only trade products maturing after June 2023 or for facilities that do not have a termination date. This may change in the future.

On 20 October 2021, 6 US regulators announced that parties should not enter into new USD LIBOR contracts after 31 December 2021 other than in some very limited circumstances such as (i) transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure; (ii) market making in support of client activity related to USD LIBOR transactions executed before January 1, 2022; (iii) transactions that reduce or hedge the institution's or any client of the institution's USD LIBOR exposure on contracts entered into before January 1, 2022; and (iv) novations of USD LIBOR transactions executed before January 1, 2022.

‘New contracts’ would include agreements that (i) creates an additional LIBOR exposure for a supervised institution or (ii) extends the term of an existing LIBOR contract. A draw on an existing agreement that is legally enforceable (e.g., a committed credit facility) would not be viewed as a new contract.

While Term RFRs develop, ANZ is currently planning to offer T&SC customers these alternative reference rates to LIBOR on an interim basis:

• ANZ cost of funds for USD
• Rate Acceptance. This is the process of ANZ presenting a fixed rate to you on a drawdown by drawdown basis, and you accepting the rate offered (Rate Acceptance). This provides you with the option to accept the rate offered and offers you transparency as to the rate that will apply following drawdown. If you do not accept this rate, then you may choose not to draw/utilise the product. However, this process necessarily means that there will be less pricing certainty for you when the facility is put in place
• For products where interest is payable in arrears, an overnight RFR.

ARRC announced it has selected CME Group as the administrator of a forward-looking SOFR term rate. CME Term SOFR Reference Rates are derived from CME SOFR Futures and published for 1-month, 3-month and 6-month tenors.

Whilst ANZ cannot provide you with any advice or recommendations, for customers with USD LIBOR transactions, ANZ can support you to manage the transition of your T&SC product by initially using LIBOR and including pre-agreed RFR mechanics, with those pricing mechanics applying at a later date.  This will mean that the agreement will continue on USD LIBOR until ANZ delivers to you, and you accept a “rate switch notice”.  Pricing for that agreement will then “switch” from USD LIBOR plus margin to  the aggregate of Term SOFR , the credit adjust spread and margin from the rate switch date.

However, the scope to use a rate-switch structure is now highly diminished. It is only available for USD and, even then, only until 31 December 2021.  If the signing of your contract slips past 31 December 2021, we will not be able to offer the rate switch option even if the document is substantially in agreed form due to regulatory guidance.  Therefore, if you would like to adopt the rate switch option, the agreement must be signed and dated on or prior to the 31 December 2021.  

In order to mitigate potential economic value transfers on transition from LIBOR-based rates to RFR-based rates, a CAS needs to be agreed between the parties. Once agreed, CAS applies for the remaining life of the product . The CAS will not reset at the beginning of each interest period.

For T&SC products, ANZ will be adopting the 5-year historical median approach to CAS for transitioning transactions.  As the spread between LIBOR and the RFR for each currency is different, there is a different CAS value for different currencies.  The CAS will also be affected by the tenor of the interest rate period (i.e., there will also be a different CAS agreed for 1M, 3M and 6M drawings)

Under the 5-year historical median approach, the CAS for example is based on the difference between GBP LIBOR for a particular setting and SONIA compounded in arrear over the same period calculated using the median over a 5-year lookback period. This is the methodology applied by ISDA in the fallbacks set out in Supplement 70. Each of ISDA, FCA, RFR WG^disclaimer, ARRC, and the National Working Group on Swiss Franc Reference Rates have made various recommendations regarding the preferred approach (and have generally either recommended the 5-year historical median spread approach, or otherwise recognised it as an appropriate approach). In addition, on 25 March 2021, the ARRC included the 5-year historical median values in its Replacement Benchmark concept in its Supplemental Recommendations of Hardwired Fallback Language for Syndicated Loans and Bilateral Business Loans. In recent transactions, ANZ has tended to more often observe the 5-year historical median approach.

As a result of the FCA announcement on 5 March 2021, the 5-year historical median as published by Bloomberg is now fixed and available here. Refer to Did the FCA announcement fix ISDA’s spread adjustment? for more information.

Given its availability through various published information sources, the 5-year historical median approach offers greater transparency for both parties and given it is now a fixed value, simplifies operational processes.  

Given the greater transparency and its operational simplicity, ANZ’s preference is to use the 5 year historical median approach.

Whilst the base currency for a product/facility might be a non LIBOR currency (e.g. AUD), benchmark transition may still be relevant where the product/facility contains multicurrency language or the option of drawing in alternative currencies. Multicurrency trade facilities will need to be amended to reflect alternative rates to LIBOR for those currencies that are priced by reference to LIBOR rates before the end of 2021 (other than for USD).

Importantly, certain trade products contain an “all currency” multicurrency option. The “all currency” option gives you the ability to make drawings or utilisations in “any currency which is acceptable to ANZ.” With most LIBOR settings ceasing at the end of 2021 (other than certain USD settings), the “all currency” option may be problematic as drawings/utilisations of certain available currencies are priced by reference to LIBOR. Even if you only use the “all currency” product in currencies that are not impacted by the impending LIBOR cessation, amendments may be required to your documentation for these trade products.  Accordingly, for the “all currency” product to continue to operate for LIBOR currencies beyond 2021, ANZ will contact you to discuss relevant amendments for transition to RFR.  

Given the staggered cessation dates for different LIBOR currencies and settings, ANZ expects customers will want to give higher priority to transitioning transactions referencing non-USD LIBOR ceasing at the end of 2021. It is important for banks, other market participants and customers to focus on their transition efforts in order to ensure transition is completed during 2021 for those rates ceasing or becoming unrepresentative at the end of 2021. Banks, other market participants and customers also need to be mindful of and observe the recommended milestones for action issued by the national working groups supported by regulatory agencies.

Part of the rationale for the extension of USD LIBOR until June 2023, was to allow a significant volume of USD LIBOR transactions to mature without the need for amendment. As existing USD LIBOR transactions mature, transition efforts of banks, market participants and customers should be directed to the replacement of these transactions (if being replaced) with new USD transactions referencing SOFR.

To transition your existing transactions away from LIBOR, you should work with ANZ (and your other banks) to agree the changes required to the commercial terms, document those changes to the commercial terms and execute the necessary amendment documentation. In the coming months, your usual ANZ representative will be available to assist you in this process. An ANZ deal team including your usual ANZ representative and other product subject matter experts will work with you to make the transition process as efficient as possible.

ANZ is only able to provide general information (such as that contained in these FAQs) and factual information to assist your transition away from LIBOR. ANZ is not able to advise you about your transition options in any way. You will therefore need to seek independent legal, system, regulatory, tax and accounting advice about LIBOR transition.

RFRs are published on a daily basis. Product terms should give parties sufficient time for notice and collection of payment. To calculate an interest amount based on a RFR for a particular interest period, 4 interest calculation methods currently exist. The 4 interest calculation methods are:

• Observation period shift
• Lookback
• Payment delay
• Lockout

Each of the 4 interest calculation methods are described in more detail in the diagrams below. These methods can be applied to loans, derivatives and bonds. Note that payment delay is not typically used in loans.

3M LIBOR Interest period

Observation period shift example

Observation period shift – keeps existing LIBOR payment dates

• 5 business day observation period shift where the start and end date of the calculation period are moved to the dates 5 business days earlier

• SOFR is observed each day SOFR is published in the observation period

• In the calculation of the daily compounded interest amount, there are 2 inputs – (i) the observed SOFR and (ii) the weighting of each day. For an observation shift, the weighting for each day is determined by the relevant day in the observation period

• Each business day in a week is given a weighting of ‘1’ except for Friday which has a weighting of ‘3’ (as Friday covers 3 calendar days). If there is a bank holiday in the week then the day prior is given a weighting of ‘2’ (representing the business day and the next day)

Lookback example

Lookback – keeps existing LIBOR payment dates

• SOFR is observed on each day of the calculation period using the SOFR rate published 5 business days earlier
• Weighting for each day is determined by the relevant day in the calculation period

Lockout example

Lockout – keeps the existing LIBOR payment dates and aligns SOFR fixings with the original LIBOR interest period but with a lockout period

• SOFR is observed on each day of the period aligned to the original LIBOR interest period
• SOFR for each day in the lockout period. This means SOFR is then fixed observed on the 1st day of the lockout period
  (i.e. the lockout date) will be used for each of the remaining business days in the lockout period. This allows for the final interest amount to be known 4 business days before the payment date

Payment Delay example

Payment delay – aligns SOFR fixings with the original LIBOR interest period (for swaps market)

• SOFR is observed on each day of the original LIBOR interest period. This requires the use of a 2 business day payment delayon both legs of the swap
• This is similar to the convention used in ISDA’s USD-SOFR-COMPOUND floating rate option which uses a 2 business day offset

Whilst your circumstances are unique to you, some of the more common potential issues for you to consider in your transition planning are:

• Ensuring all your LIBOR exposures have been identified
• Managing the necessary systems and operational changes to support RFR
• Capturing market rate data and monitoring changes to the timing for publication of the RFR
• Adjusting the cash flow modelling approach to allow for backward-looking rates (as interest will not be known until close to the payment date)
• Where you hedge a loan or a bond, ensuring hedge effectiveness if desired, and reducing basis risks where possible
• Understanding the documentation changes required and managing the amendment and re-papering process
• Ensuring you have a detailed transition plan for transitioning from LIBOR to RFRs is in place
• Understanding the cost/benefits of early transition versus relying on fallbacks to transition
• Ensuring senior management and senior stakeholders are aware of the need to transition away from LIBOR to RFR and the impact that will have on your business

While ANZ is here to help, ANZ can only provide you with information and is not able to advise you about your transition options in any way. You will therefore need to seek independent legal, systems, regulatory, tax and accounting advice about LIBOR transition.

Whilst your circumstances are unique to you, some of the more common potential issues for you to consider in your transition planning are:

• Ensuring all your LIBOR exposures have been identified
• Managing the necessary systems and operational changes to support RFR
• Capturing market rate data and monitoring changes to the timing for publication of the RFR
• Adjusting the cash flow modelling approach to allow for backward-looking rates (as interest will not be known until close to the payment date)
• Where you hedge a loan or a bond, ensuring hedge effectiveness if desired, and reducing basis risks where possible
• Understanding the documentation changes required and managing the amendment and re-papering process
• Ensuring you have a detailed transition plan for transitioning from LIBOR to RFRs is in place
• Understanding the cost/benefits of early transition versus relying on fallbacks to transition
• Ensuring senior management and senior stakeholders are aware of the need to transition away from LIBOR to RFR and the impact that will have on your business

While ANZ is here to help, ANZ can only provide you with information and is not able to advise you about your transition options in any way. You will therefore need to seek independent legal, systems, regulatory, tax and accounting advice about LIBOR transition.