On July 08, 2021, the Reserve Bank of India (RBI) issued an advisory to banks and other RBI-regulated entities to prepare for the transition from the international benchmark reference rate, ‘London Interbank Offered Rate’ (LIBOR), to any other widely accepted Alternate Reference Rates (ARR).
Background:
i.LIBOR is used widely by the global financial system as one of the interbank benchmarks for a large volume and broad range of financial products and contracts.
ii.As per the 2014 Financial Stability Board report, the cases of attempted market manipulation and false reporting of global reference rates, have mitigated the confidence in the reliability and robustness of LIBOR.
iii.In July 2017, Financial Conduct Authority (FCA) in the United Kingdom decided to stop LIBOR lending by December 2021 and suggested using ARRs. In March 2021, FCA ceased the use of LIBOR by any administrator and stated that it would no longer be representative.
iv.Among the 5 currencies under LIBOR, the US dollar would exit by the end of June 2023 and the remaining 4 currencies (Swiss franc, euro, sterling, and yen) would exit by the end of December 2021.
Note – Globally, $260 trillion in contracts are linked to LIBOR. The RBI estimated India’s LIBOR exposure at $331 billion.
Key Suggestions of RBI:
i.RBI has advised the Financial Institutions (FI) not to enter into new LIBOR referenced contracts and encouraged them to use any widely accepted ARR.
ii.It has instructed the FI to incorporate robust fallback clauses in all the LIBOR reference-based financial contracts that have maturity after December 31, 2021.
iii.It also directed banks to undertake a comprehensive review of all direct and indirect LIBOR exposures and put in place a framework to mitigate risks arising from such exposures.
iv.MIFOR: RBI has also advised banks to stop using the ‘Mumbai Interbank Forward Outright Rate’ (MIFOR), which references the LIBOR, and was published by the Financial Benchmarks India Private Ltd (FBIL).
- FBIL has started publishing daily adjusted MIFOR rates from June 15, 2021, and modified MIFOR rates from June 30, 2021, which can be used for legacy contracts and fresh contracts respectively.
v.RBI allowed banks to trade Contracts referencing LIBOR/MIFOR 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.
Alternate Reference Rates (ARRs):
Secured Overnight Financing Rate (SOFR) and Sterling Overnight Interbank Average Rate (SONIA) are the two popular ARRs, but only a few swap deals are linked to them internationally.
Recent Related News:
On March 16, 2021, the State Bank of India (SBI) and Indian Oil Corporation Limited (IOCL) inked the first SOFR linked External Commercial Borrowing (ECB) deal by replacing the LIBOR which is used by world banks when charging each other for short-term loans.
About Reserve Bank of India (RBI):
Subsidiaries of RBI:
i.Deposit Insurance and Credit Guarantee Corporation of India (DICGC),
ii.Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),
iii.Reserve Bank Information Technology Private Limited (ReBIT),
iv.Indian Financial Technology and Allied Services (IFTAS)
Note – Earlier National Housing Bank(NHB) was also one of the subsidiaries of RBI and after RBI has divested its entire stake in NHB, it is not a subsidiary of RBI.
