What is the Impact of LIBOR Discontinuation to customers?
If payments under a product is calculated by reference to LIBOR and if such rate is permanently discontinued, the relevant contract needs to be reviewed to assess if the relevant consequences are specified in the terms of the contract. If not, parties will have to agree to apply a new benchmark or a “fallback language” in place of LIBOR upon its discontinuation so that the contract can continue to be effective.
What is fallback language?
Fallback language refers to the contractual provisions that lay out the process through which a replacement rate can be identified if a benchmark (e.g., USD LIBOR) is not available. In other words, the fallback language within a contract acts as a how-to guide for identifying replacement rates (hereafter referred to as benchmark replacements or replacement rates) should the original benchmark be unavailable.
What are the products that will be affected?
Any product using LIBOR as a reference rate will be affected. This could include derivatives, cash market products (e.g. business loans, syndicated loans, retail mortgages, floating rate notes, perpetual bonds and banks’ capital instruments), as well as outstanding debt securities with resettable interest rate features referencing LIBOR.
When will AfrAsia make clear the new benchmark rates it will use in replacement of LIBOR?
The Bank is taking guidance regulatory authorities on the transition from LIBOR-based interest rate benchmarks to appropriate alternatives in the banking products we offer to our customers. While some jurisdictions are more advanced in that review, the transition is expected to occur by end-2021. We are committed to providing our customers advance notice before these changes take place to keep them updated on the changes that will impact them.
How do I know if I have an exposure to LIBOR?
We encourage you to review all your outstanding financial contracts that are maturing beyond 2021 to ascertain if they reference LIBOR (either directly or indirectly) for any determination.
I hold products which reference LIBOR. What should you do now?
As part of our communication plan, our clients with LIBOR exposures will be contacted to discuss the appropriate next steps and make the transition process as smooth as possible. For now, there are steps you can be taking now to prepare:
- review information available on LIBOR and other legacy benchmark transition;
- undertake a review of any transactions you have that are based on LIBOR and other legacy benchmarks;
- consider the potential impacts that the discontinuation of LIBOR and other legacy benchmarks may have on your business;
- consider the potential impacts that the transition to alternative interest rate benchmarks may have on your business; and
- consider seeking advice from your financial and/or legal advisers.