Interest rates can be fixed or alternatively calculated by reference to benchmark rates. The London Interbank Offered Rate (LIBOR) is one of the most commonly used benchmarks for interest rates and is referenced in financial products such as derivatives, bonds, loans, structured products, mortgages. It often forms the basis on which interest payments under those products are calculated.

LIBOR is published on each London business day and is administered by ICE Benchmark Administration (IBA). It is based on quotations received from LIBOR panel banks, which are a group of banks who provide information to IBA as to the amount it would cost them to borrow from other banks so that an average can be calculated and published.

LIBOR is published in five currencies (Euro, Japanese Yen, Pound Sterling, Swiss Franc and US Dollar) and for seven interest periods (ranging from overnight to 12 months).

Certain jurisdictions also use a specific benchmark for their currency such as EURIBOR for EUR or TIBOR for JPY. Other IBORs also exist in other currencies (for example, HIBOR in Hong Kong and SIBOR in Singapore).

The issues which affect the perceived robustness of LIBOR (such as the lack of interbank lending transactions on which to base the rate) also affect other interbank offered rates (IBORs) such as EURIBOR. The way in which EURIBOR is calculated has therefore been reformed and subsequently confirmed by the European Money Markets Institute (EMMI) to continue to exist for the foreseeable future. 

In the United States, the preferred near risk-free rate (which is called the Secured Overnight Financing Rate or SOFR) is a new rate. Currently, the most frequently used overnight interest rate benchmark in the United States is the Effective Federal Funds Rate (EFFR). In connection with the transition away from US Dollar LIBOR, a working group in the United States which consists of both private and public sector entities - known as the Alternative Reference Rates Committee (ARRC) - is currently planning a transition to SOFR which will result in SOFR being used instead of EFFR in certain circumstances.

In addition to the IBORs, other interest rate benchmarks are being looked at. For example, the way in which the Euro Overnight Index Average (EONIA) is determined is expected to change so that it is calculated as the Euro Short Term Rate (€STR), which is a new rate published since October 2019, plus a spread adjustment. It is also currently anticipated that EONIA will be discontinued at the end of 2021 to be replaced by €STR.

Other rates are also being looked at in Hong Kong, Singapore, Australia and Canada amongst other places. As at 1 January 2021, the level of information varies between jurisdictions with regards to the replacement benchmark, timescale or transition methodology.

The link below directs to the LIBOR Risk Disclosure addressed to those who are considering an investment product or a credit facility that uses LIBOR. The document outlines the use of alternative interest rate benchmarks and the potential impact of these changes.

Alternative rates other than above may also be considered depending on products and currencies.

(1)   The rate published on 2 October 2019 was the rate for 1 October 2019 as €STR is published on a next-day basis.

(2)   In Q4 2020 SOFR replaced the Effective Federal Funds Rate (EFFR) as the rate used for discounting and Price Alignment Interest (PAI) in the cleared context.

The current IBORs are calculated by reference to daily submissions by panel banks. These daily submissions are often based on forward looking estimates by the panel banks, whereas most replacement benchmark rates will be based on actual historic transactions.

The RFRs are backward-looking overnight rates (i.e. they are published at the end of the overnight interest period). This is different to the IBORs which are forward-looking term rates (i.e. they are published for different periods of time, such as 3 months and 6 months, at the beginning of the interest period). The various RFR working groups are considering whether robust forward-looking term versions of the RFRs can be developed. The Working Group on Sterling Risk-Free Reference Rates, for example, consulted on a term SONIA reference rate in 2018. ICE Benchmark Administration and Refinitiv have finalised their methodologies and launched their respective term SONIA benchmarks. Both benchmarks are available in 1-month, 3-month, 6-month and 12-month tenors. The Alternative Reference Rates Committee (ARRC) in the US is also looking at developing a term SOFR rate by mid-2021.

RFRs are administered by the central bank in the relevant jurisdiction.

The link below directs you to the RFR Risk Disclosure outlining a number of potential impacts and key risks of entering into a product which references an RFR directly or indirectly.

¹ https://www.fca.org.uk/publication/documents/future-cessation-loss-representativeness-libor-benchmarks.pdf ↩

² https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/rfr/rfrwg-further-statement-on-the-impact-of-coronavirus-on-timeline-for-firms-libor-transition-plans.pdf ↩

These changes may impact the HSBC products and services you currently use and those we provide in the future, including changes to interest payment and other obligations. The extent of the impact will depend on a range of factors such as the IBOR referenced, the fallbacks (if any) in the product, the date by when the changes will take effect and the nature of the product or service.

For example, if there is a permanent discontinuation of LIBOR and an alternative benchmark is agreed for a credit facility, it is possible that the alternative benchmark may result in changes to the amount payable under the facility.

The impact of the changes may also vary depending on whether the relevant benchmark is being discontinued or if it is being reformed. 

We are actively monitoring developments and are participating in industry and regulatory working groups. HSBC will provide more detailed information to impacted clients once there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.

HSBC is participating in a number of public and private sector working groups such as the Sterling Risk-Free Rate Working Group, the Alternative Reference Rates Committee in the United States and the Working Group on Euro Risk-Free Rates, each of which was responsible for identifying the preferred near risk-free rate for the relevant currency and is now encouraging and supporting the transition away from LIBOR rates.

HSBC also participates in industry body working groups such as the International Swaps and Derivatives Association, Inc. (ISDA) working groups on the IBORs and the EU Benchmark Regulation (BMR). HSBC may participate in other industry working groups in the future, including those that are considering the impact of LIBOR replacement on specific types of products and services to ensure our approach is aligned with industry practice.

HSBC is aware that the discontinuation of LIBOR or other IBORs may impact both its new and existing products and services and that the impact on clients, including other relevant parties, will need to be carefully considered.

HSBC is conducting due diligence to review and confirm how LIBOR and other IBORs are used in HSBC products and services. HSBC is monitoring this situation and, where required, will provide clients with further information. 

We have already included arrangements in our new LIBOR-referencing documents for credit facilities or investment products, where applicable, to facilitate the transition to an alternative rate upon LIBOR cessation.

We are building the necessary capabilities to offer products based on alternative rates ahead of the date on which LIBOR ceases to exist. The availability of these products will vary per currency, depending on the regulatory and industry developments. We are also monitoring the transition plans of our third party product manufacturers to ensure that we remain compliant with the regulatory and industry recommendations.

While HSBC’s internal planning and due diligence on these changes are well under way, as noted above, it is not yet possible to accurately determine the precise impact on all parties, including clients, until a replacement for the existing benchmark rates (including the preferred near risk-free rate or other alternative reference rates and any necessary adjustments) has been confirmed at industry level and until more information is known on the timing of the changes.

Although the available information is currently limited, clients may wish to review their existing products – including loans, mortgages and investment products – to check whether any of these reference the in-scope IBORs or other interest rate benchmarks.

Where required, we will inform our clients of the changes on their affected products and services as soon as there is more information available.