Australian financial regulators have put financial institutions on notice that they must stop using the London interbank offered rate as a reference rate in new contracts before the end of 2021.
Capital markets around the world are moving away from the use of LIBOR and other “IBORs” in favour of more robust reference rates.
In March, Ice Benchmark Administration, which administers and publishes LIBOR, confirmed that it will publish most LIBOR rates for the last time on December 31.
By then different markets will have moved to new reference rates. In the United Kingdom, for example, UK LIBOR will be replaced by the Sterling Overnight Index Average (SONIA).
In most cases, the new reference rates are overnight risk-free rates. Australia’s alternative reference rate for Australian dollar-based transactions is AONIA, which is effectively the overnight cash rate.
The Australian situation differs from other markets in that the old benchmark, BBSW, will continue to be used.
On Friday, APRA and ASIC and the Reserve Bank released a joint statement saying use of LIBOR should cease “as soon as practicable”.
Some US dollar LIBORs will continue until mid-2023 but US banking supervisors have told companies that they should stop using it as a reference rate by December 31.
The regulators also expect firms to amend legacy contracts, where this can be done, to replace LIBOR reference with the appropriate risk-free rate.
Where that cannot be done, because of the number of counterparties and the complexity of the contract for example, a fallback protocol should be in place.
The International Swaps and Derivatives Association has developed a LIBOR fallback protocol, which provides replacement rates that apply to trades referencing a particular benchmark and which take effect if the benchmark becomes unavailable while market participants have exposure to that rate.