With the UK’s Financial Conduct Authority (FCA) announcing that it will cease to provide the London interbank offered rate (Libor), the Reserve Bank of India (RBI) has issued an advisory to the banks on a transition plan, and for the adoption of alternative reference rates (ARRs).
The FCA will stop approving Libor rates from 1 January 2022 for the pound sterling, Euro, Swiss franc and Japanese yen settings, and the one-week and two-month US dollar settings, while for the remaining US dollar settings, Libor rates will cease from 1 July 2023.
The transition away from Libor and the adoption of ARRs need careful management to ensure customer protection, avoid reputational issues and litigation and disruptions to financial institutions and the overall economy, the RBI said in its advisory.
The RBI has encouraged banks and their clients to cease entering into new financial contracts that reference Libor, as well as the Mumbai interbank forward outright rate (Mifor), which references the Libor, as a benchmark and instead use any widely accepted ARR as soon as practicable, and in any case by 31 December this year.
Contracts referencing Libor or Mifor may only be undertaken after 31 December 2021 for the purpose of managing risks arising out of Libor or Mifor referenced contracts undertaken on or before that date.
Banks have been asked to do a comprehensive review of all direct and indirect Libor exposures and put in place a framework to mitigate risks arising from exposures to the rates on account of transitional issues such as valuation and contractual clauses. They may also have to put in place the infrastructure to offer products referencing the ARR.
The central bank has asked banks and their clients to include fallback clauses in new contracts entered into before 31 December 2021 that reference Libor, and the maturity after the date on which Libor ceases or becomes non-representative.
Banks may refer to standard fallback clauses developed for this purpose by various agencies such as the International Swaps and Derivatives Association, Indian Banks’ Association, Loan Markets’ Association, Asia Pacific Loan Markets Association and the Bankers Association for Finance & Trade, the advisory said.
