“Banks and financial institutions are encouraged to cease entering into new financial contracts that reference LIBOR as a benchmark,” the central bank said Thursday. …and instead use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021.”
In March, the UK’s Financial Conduct Authority (FCA) said that all LIBOR settings would either cease to be provided by administrators or no longer be representative.
More than $350 trillion worth of estimated contracts across the globe are pegged to the Libor, which is the key interest rate benchmark for several major currencies.
Nearly a decade ago, a major scandal was unearthed triggering a slew of lawsuits, punishments and regulatory penalties. Now, a transition is taking place globally with banks adopting ARRs that include new benchmarks – the Sterling Overnight Interbank Average (SONIA) or Secured Overnight Financing Rate (SOFR).
“Use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021”
Back home, local lenders have tested SOFR, with large banks including ICICI Bank and executing a few transactions.
“Banks have also been advised to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, as soon as practicable and in any event by December 31, 2021,” the Reserve Bank of India (RBI) said.
By June 30, 2023, the tainted matric will permanently cease to exist.
Financial Benchmarks India Pvt Ltd (FBIL) has started publishing daily adjusted MIFOR rates from June 15 this year and modified MIFOR rates from June 30, which can be used for legacy contracts and fresh contracts respectively.
“Contracts referencing LIBOR / MIFOR may generally be undertaken after December 31, 2021 only for the purpose of managing risks arising out of LIBOR / MIFOR referenced contracts undertaken on or before December 31, 2021,” the central bank said.
In August 2020, RBI had advised banks and financial institutions to assess their LIBOR exposures that will mature after the cessation of the LIBOR. It suggested creating a board-approved plan for the steps to be taken to address the risks arising from the LIBOR transition.
The transition away from LIBOR and adoption of ARRs developed in various jurisdictions is a significant event that needs careful preparation to manage potential customer protection, reputational and litigation risks and to avoid disruptions to the safety and resilience of financial institutions and overall financial stability of the economy, RBI said.
