LIBOR transition

BNY Mellon Investment Management EMEA: LIBOR transition – an update on our plans to move from interbank offered rates to alternative reference rates

Financial entities around the globe are rigorously preparing to transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs), which are currently used in a significant number of financial instruments and products. It is expected that IBORs will be phased out for use as early as the end of 2021, in favour of more robust alternative reference rates (ARRs).

Here we provide an overview of interbank offered rates, the reasons behind the finance industry’s transition from IBORs to ARRs and how BNY Mellon Investment Management’s UK- and EU-domiciled fund ranges are impacted.

What are interbank offered rates?

Interbank offered rates (IBORs) are unsecured interest rates published for periods ranging from overnight to 12 months.

One of the most widely used IBORs is the London Interbank Offered Rate (LIBOR), which is quoted in British pound sterling (GBP), US dollar (USD), euro (EUR), Swiss franc (CHF) and Japanese yen (JPY). These rates are derived from quotes submitted by a group of panel banks that represent each bank’s cost of obtaining a loan from another member bank in the London interbank market for each of the published tenors.

IBORs also act as a benchmark for short-term interest rates across a wide spectrum of cash and derivative products. The volume of these transactions exceeds US$400 trillion globally[1].

Why is the financial industry transitioning from LIBOR and IBORs?

Amid the financial crisis of 2008, multiple investigations by national regulators and central banks were launched regarding attempts by certain institutions to manipulate LIBOR, by coordinating their submission of the interest rate quotations that underpin the rate. Given the structural weaknesses of LIBOR identified during these investigations, various regulatory authorities have announced support for a reduced reliance on IBORs in favour of rates based on actual underlying transaction rates. In particular, LIBOR is expected to be phased out as early as the end of 2021.

Regulators around the globe have initiated forums for market participants to identify alternative reference rates (ARRs). These forums were tasked with three primary objectives:

  1. Identify a rate that was more firmly based on transactions from a robust underlying market and aligned with the International Organization of Securities Commissions (IOSCO) principles for Financial Benchmarks.

  2. Develop a plan to facilitate the acceptance and use of selected alternative rates by market participants

  3. Consider best practices in contract design that would ensure resiliency in the event of possible cessation or material alteration to the selected alternative rate or any subsequent reference rate

 

As part of this work, regulators have identified various ARRs as possible replacements, and are considering ways of effecting the transition away from IBORs. Currently, it is not possible to confirm either the rates that will be used as alternatives to LIBOR or the adjustment spreads, if any, that may be applied to a given replacement rate.

Proposed regional benchmark replacements
How does LIBOR transition impact the pooled fund ranges distributed by BNY Mellon Investment Management EMEA?

A number of pooled funds within the BNY Mellon Global Funds plc (MGF), BNY Mellon Investment Funds (MIF) and BNY Mellon Managed Funds II (MMF II) umbrellas currently have exposure to LIBOR or IBORs. Primarily, this exposure is through the Sub-Funds having LIBOR-based performance benchmarks (at Sub-Fund and/or share class level) and through the calculation of performance fees, where applicable. A table providing a summary of the impacted funds can be found below.

Also detailed in the following table are pooled funds within the BNY Mellon Charities Funds umbrella and the Newton SRI Fund for Charities, which are primarily distributed by Newton Investment Management Limited.

For the avoidance of doubt, sub-fund benchmarks are reviewed for appropriateness, on an ongoing basis and changes to benchmarks may be considered from time to time.
1. For these Sub-Funds currency equivalent LIBOR benchmarks are also applicable at a share class level and are considered in scope of the transition away from LIBOR.

Please note only USD, GBP, CHF and JPY LIBOR are considered to be in scope for cessation. EURIBOR has been reformed and will continue as a BMR (Benchmark Regulation) compliant rate, including tenors (e.g. 1, 3 and 6 months).

For the funds detailed in the table above we are currently working closely with the respective Investment Managers, to identify the most suitable ARR as a replacement for LIBOR. The best interests of investors is the primary concern.

Once the replacement rate has been identified, the proposed ARR will be submitted to the relevant governing body for approval. Once the proposed replacement rates are approved, we will commence the technical implementation of the transition project which will include regulatory submissions (to the Central Bank of Ireland and UK Financial Conduct Authority), client communication and relevant documentation updates (including Prospectus and Key Investor Information Documents).

While we are making best efforts to ensure the transition away from LIBOR has minimal  impact to clients, we are mindful that there is no like for like replacement rate available at the moment as ARRs are transaction-based and currently do not include equivalent tenors. We will ensure to provide sound explanation of the ARR that we are choosing to transition each affected product to and why this is in the best interest to clients.

Decisions surrounding the transition to ARRs will be made as soon as appropriate and in time to complete transition by end of 2021.

[1] Source: ISDA IBOR Global Benchmark Survey – 2018 Transition Roadmap