Overview

The London Interbank Offered Rate (LIBOR)*, one of the main interest reference rates used in financial markets across the globe, will cease to exist or will be non-representative starting on January 1st 2022. In particular, the Financial Conduct Authority in the United Kingdom (FCA) announced on March 5, 2021 that LIBOR panel Bank Submissions will cease immediately after December 31, 2021 for all GBP, EUR, CHF, and JPY settings as well as for the 1-week and 2-month USD settings. The FCA also announced that the remaining LIBOR settings for USD will cease on June 30, 2023.

LIBOR’s weaknesses have led regulators to decide a transition away from LIBOR to alternative reference rates known as Risk-Free-Rates (RFRs). National Working Groups were established to create new rates, based on recommendations of the Financial Stability Board, an international body monitoring the global financial system.

Financial Institutions across the globe are now in the process of revising their infrastructure, preparing a switch by the end of 2021. The changes will affect LIBOR and EONIA (Euro Overnight Index Average). EURIBOR (Euro Interbank Offered Rate) was fundamentally reformed in compliance  with Regulation (EU) 2016/1011 of the European Parliament and of the Council of June 8, 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (“Benchmark Regulation” or “BMR”, see below in FAQ). EURIBOR is expected to remain in use until any announcements by its administrator are available.

In view of the concerns expressed by the European banking industry regarding the transition from LIBOR to RFRs and following consultations that took place, the European Commission has adopted the option provided for in paragraph 8 of article 23b of the Benchmark Regulation and proceeded on 14 October 2021 to issue the Commission Implementing Regulation (EU) 2021/1847 on the designation of a statutory replacement for certain settings of CHF LIBOR, thus regulating the replacement rate for specific versions of the CHF LIBOR and the fallback (fixed) “spread adjustment” that shall be added in the context of the replacement of CHF LIBOR.

Alpha Bank Cyprus Ltd is taking all the necessary steps to ensure compliance with the regulatory changes currently under way. Furthermore, it monitors the market develpments and is contact with the competent authorities, aiming to ensure a successful transition for its Customers. Alpha Bank Cyprus Ltd supports the transition to RFRs and intends to help its Customers to reach the post LIBOR era.
 
*LIBOR in the five LIBOR currencies, USD, GBP, EUR, JPY and CHF. For USD LIBOR only 1w & 2m setting will cease to exist after December 31st 2021 but all new financial products post that date should not be generated to the remaining LIBOR tenors.
 

Frequently Asked Questions

What is a Benchmark?

Benchmark means any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees.

Benchmarks are calculated by a representative set of data or information for the purpose of the invoicing of the financial instruments and/or for capturing borrowing costs in markets.
 

What is the European Benchmarks Regulation?

The European Benchmarks Regulation (BMR) is intended to protect consumers and investors. It increases transparency and governance requirements on all firms that provide, contribute to, or use a wide range of interest rates, currencies, securities, commodities, and other indices or reference prices.
 

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is published daily by the ICE Benchmark Administration (IBA) and reflects the lending cost for banks in the unsecured money market for various currencies.
 
LIBOR represents a wholesale funding rate provided by LIBOR panel Banks (i.e. Banks contributing to the calculation of LIBOR) based on unsecured wholesale transactions to the greatest extent possible, with a waterfall to enable a rate to be published in all market circumstances.
 

When will LIBOR cease?

The Financial Conduct Authority in the United Kingdom (FCA) announced on March 5, 2021 that LIBOR panel Bank Submissions will cease immediately after December 31, 2021 for all GBP, EUR, CHF, and JPY settings as well as for the 1-week and 2-month USD settings. The FCA also announced that the remaining LIBOR settings for USD will cease on June 30, 2023.
 

What does it mean that the London Interbank Offered Rate (LIBOR) will be non-representative after end-2021?

'Non-representative' means that the rate is no longer representative of the underlying market and economic reality it is intended to measure.
 

What is a New Risk-Free Rate?

In view of LIBOR ceasing to be published after year-end 2021, the National Working Groups have already identified alternative rates (new Risk-Free Rates).
 
New Risk-Free Rates are overnight reference rates that measure the cost of borrowing in interbank market. Each of the major jurisdictions (US, UK, Switzerland, Japan and the Eurozone) have identified alternative reference rates (Risk-Free Rates).
 

Which benchmarks will be impacted?

National Working Groups were established by regulators and central banks in different jurisdictions aiming to reform all Libor term rates, inclusive of overnight rates. As of yet, not all details have been finalized. The LIBORs affected are presented in the following table:
 

Benchmark Rate (LIBOR)	Alternative Risk Free Rate	National Working Group	Administrator Risk Free Rate
USD LIBOR	SOFR	Alternative Reference Rates Committee	Federal Reserve Bank of New York
GBP LIBOR	SONIA	Bank of England Working Group on Sterling Risk- Free Rates	Bank of England
EONIA EUR LIBOR	€STR	Working Group on Euro Risk-Free Rates	European Central Bank
JPY LIBOR	TONAR	Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks	Bank of Japan
CHF LIBOR	SARON	National Working Group on Swiss Franc Reference Rates	SIX Swiss Exchange

How the New Risk-Free Rates are different from LIBOR?

The main difference between the alternative Risk-Free Rates and LIBOR rates is that the new rates are overnight rates, and not term rates like LIBOR.
There are fundamental and technical differences between LIBORs and the new RFRs. To accommodate these differences, an established market approach recommended by ISDA (International Swaps and Derivatives Association) and the ARRC * (Alternative Reference Rates Committee) was implemented for the calculation of the fallback (fixed) “spread adjustment”. After the cessation announcement by the FCA, the fallback (fixed) “spread adjustment” was locked and was published by Bloomberg in the following link: Fallback (fixed) "spread adjustment".
Regulators expect active transition to new risk-free rates linked products as the primary transition strategy.
 
*The ARRC is a group of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from USD LIBOR to a more robust reference rate, its recommended alternative, the Secured Overnight Financing Rate (SOFR). It is comprised of a diverse set of private-sector entities, each with an important presence in markets affected by USD LIBOR, and a wide array of official-sector entities, including banking and financial sector regulators.
 

What is fallback (fixed) “spread adjustment”?

There are fundamental and technical differences between LIBORs and the new RFRs. To accommodate these differences, industry working groups recommend the usage of a fallback (fixed) “spread adjustment”. The established market approach for the fallback (fixed) “spread adjustment” is based on the 5-year historical median that calculates the difference between LIBOR and the alternative reference rate over five years’ worth of daily data points.
 

What impact will the transition have on LIBOR-based products?

The transition from LIBOR will impact both existing and future transactions in cash markets (loans and bonds), in derivatives as well as in other financial products/contracts that reference LIBOR.
 

What is “fallback language”?

Fallback language refers to the contractual provisions that specify the trigger events for a transition to a replacement rate, the replacement rate, and the spread adjustment to align the replacement rate with the benchmark being replaced.
 

What is the Implementing Regulation (EU) 2021/1847 on the designation of a statutory replacement for certain settings of CHF LIBOR?

The following rates are designated as the replacement rates for the CHF LIBOR in references to CHF LIBOR in any contract, and in any financial instrument as defined in Directive 2014/65/EU:

• 1-month CHF LIBOR is replaced by 1-month SARON compound Rate, as observed over the 1-month period preceding the interest period;
• 3-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period;
• 6-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period;
• 12-month CHF LIBOR is replaced by 3-month SARON Compound Rate, as observed over the 3-month period preceding the interest period.

A fallback (fixed) “spread adjustment” shall be added to the replacement rates mentioned above. That fallback (fixed) “spread adjustment” shall be equivalent to the spread published for each relevant tenor and calculated on 5 March 2021 as a historical median spread between the CHF LIBOR concerned and the respective SARON compound over a five-year lookback period for each particular term.

The replacement rates for CHF LIBOR shall be designated in accordance with the following table:
 

LIBOR	TENOR	Replacement Rate	Spread Adjustment Value (%)
CHF	1M	SARON 1 month Compound Rate (SAR1MC) ISIN CH0477123886	-0,0571
CHF	3M	SARON 3 month Compound Rate (SAR3MC) ISIN CH0477123902	0,0031
CHF	6M	SARON 3 month Compound Rate (SAR3MC) ISIN CH0477123902	0,0741
CHF	12M	SARON 3 month Compound Rate (SAR3MC) ISIN CH0477123902	0,2048

The Implementing Regulation (EU) 2021/1847 shall apply as of 1 January 2022.
 

How is Alpha Bank Cyprus Ltd preparing for the LIBOR transition?

Alpha Bank Cyprus Ltd has evaluated how the transition may affect LIBOR products and has already begun preparations for the sale of products based on the new Risk-Free Rates.
 
We recommend reviewing our communications with you, in order to be informed on potential amendments on your products referencing LIBOR, due to the upcoming transition. In case your contacts with Alpha Bank Cyprus Ltd reference LIBOR, it is important that you understand how the transition will affect them.
 
We will monitor relevant developments taking all necessary actions for a smooth transition to new Risk-Free Rates.