Get ready for Libor phase-out: IBA

Mumbai: The Indian Banks’ Association (IBA) has written to companies and industry bodies, telling them to prepare for the phasing out of the London Interbank-Offered Rate (Libor).

The IBA has told companies, especially those which borrow in the overseas markets, that all contracts related to the interbank market rates must be renegotiated. Bankers that ET spoke with said this would be a tough changeover, as companies could incur higher hedging cost, losses on renegotiation of contracts and operational expenses.

The banking association sent the official communication to industry bodies including the Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry, Associated Chambers of Commerce and the PHD Chamber of Commerce and Industry. Members of these bodies are companies which likely have Libor linkages. The industry bodies could not be reached immediately for comment.

“While the banking sector is gradually preparing itself for Libor transition, it is felt that the customers of the banks need to be sensitised on the matter,” the IBA said in its letter, which ET has seen. “The transition could have wide-ranging impact on segments like derivatives, hedging, risk assessment, tax implications, legal implications, accounting practices, etc.”

Following the Libor scandal, the financial conduct authority of the UK has decided to phase out the rate by the end of 2021. Under the new regime, all contracts related to these rates will be affected and have to be renegotiated with the banks and financial institutions. More than $350 trillion of contracts across the globe are pegged to Libor, which is the key interest rate benchmark for several major currencies.

To smoothen the process, the IBA also formed a working group on Libor transition and is in the process of developing a guidance note for banks.

BCCL

The bankers’ body has also suggested companies to conduct impact assessment throughout their organisation to identify impacted areas, processes and contract systems. Besides banks, the IBA has also reached out to the associate members including asset reconstruction companies and payment companies.

Most leading banks and institutions have formed steering committees comprising members from different teams like loan syndication, treasury, risk management, technology, legal and compliance.

These committees are evaluating each business that could be impacted by the transition. The biggest challenge in the impact assessment is to identify alternative benchmarks and create a term structure out of it, say experts.

“Like the Federal Reserve, FCA and ECB, we should consider issuing a ‘Dear CEO’ letter to the banks so that the impact of transition to IBOR can be ascertained” said Rajosik Banerjee, Partner and Head, Financial Risk Management, KPMG in India.

‘Dear CEO’ letter sets out expectations over LIBOR transition.

“The IBA wants to spread awareness, particularly among private and public-sector banks as foreign banks are well equipped through their offshore offices incorporating any shift from the Libor regime,” said a senior executive involved in the processes.

The worry for bankers is that despite the announcement of Libor’s phase-out, many new long-dated derivative contracts, maturing after 2021, continue to be benchmarked to the rate.