• London Interbank Offered Rate (LIBOR) Reform Frequently Asked Questions

London Interbank Offered Rate (LIBOR) Reform: Frequently Asked Questions

What is LIBOR?

LIBOR stands for "London Interbank Offered Rate" and "LIBOR" is utilized as a reference rate at which banks could borrow money on unsecured basis. Currently, it is produced in seven tenors across five currencies (USD, EUR, CHF, JPY, and GBP) and is widely utilized by institutions to determine their product rates. LIBOR is administered by ICE Benchmark Administration ("IBA"), which is regulated by the UK Financial Conduct Authority ("FCA").

Why is LIBOR being replaced or reformed?

In 2014 the UK Financial Suitability Board recommended the development of alternative “risk-free” rates for use instead of LIBOR and other Interbank Offered Rates ("IBORs"). Following high-profile instances of LIBOR manipulation, regulatory authorities have expressed concern that the underlying market LIBOR seeks to measure is no longer sufficiently active as low levels of underlying activity increases LIBOR’s vulnerability to market illiquidity and amplification of price movements.

When will the changes take effect?

On 5th March 2021 FCA published a statement announcing that the publication of EUR, CHF, JPY and GBP LIBOR (all tenors) and USD LIBOR (one week and two month tenors) will cease at the end of 2021. The remaining USD LIBOR tenors will be published by IBA until the end of June 2023. However, the Hong Kong Monetary Authority ("HKMA") would like all the Authorized Institutions ("AIs") to implement the Alternative Reference Rate ("ARR") effective from 1 January 2022.

What is LIBOR being replaced with?

In response to the decommissioning of LIBOR, several regulations have developed alternative reference rate ("ARRs") that are expected to replace LIBOR. Benchmarks for Hong Kong and the United States are listed below:

What is SOFR?

SOFR is a broad measure of the cost of overnight borrowings through repo transactions collateralized with US Treasury securities.  It is based on actual transactions and reflects the way institutions fund themselves today.  An average of SOFR will accurately reflect movements in interest rates over a given period and smooth out any day-to-day fluctuations in the market.  Following the US Alternative Reference Rates Committee ("ARRC") formally recommending the SOFR for adoption by market participants, banks in Hong Kong are encouraged to determine transition from LIBOR to SOFR.

What are the types of SOFR alternatives available? What are the differences in calculating interest payments?

What is the impact on IFL loan offering?

BPI International Finance Limited ("BPI IFL") will cease to enter LIBOR based new loan contract / drawdown / repricing after 2021.  For existing loan repricing fall in January 2022 and/or thereafter, BPI IFL will adopt the SOFR – Simple in Arrears calculation methodology in your next repricing, to replace USD LIBOR.  The loan documentation does not require any amendments in this regard.

What should I do if I would like to discuss how the ARR will apply to my loan agreements with IFL?

You should contact BPI-IFL-RM@bpi.com.hk in the first instance or contact your Relationship Manager who will be able to direct you to a Specialist and discuss your specific query with you.

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