Global Benchmark Reform

The London Interbank Offered Rate (LIBOR), the most widely used interest rate benchmark in the world, ceased to exist in its current form as of June 30, 2023.

 

In addition to LIBOR, you may have heard about and may continue to hear about changes to other benchmark reference rates. Reference rates are utilized broadly in the construction of many financial products, including loans, floating rate notes, derivatives, and securitizations. Bank of America is working and will continue to work with global regulators, industry working groups, and trade associations, as applicable, on ongoing and future benchmark reforms.

In accordance with announcements from the United Kingdom’s Financial Conduct Authority (FCA) and LIBOR’s administrator, ICE Benchmark Administration Limited (IBA), publication of the following LIBOR settings has permanently ceased:

 

• All tenors of euro (EUR) and Swiss franc (CHF);
• Overnight, 1-week, 1-month, 2-month, 6-month, and 12-month British sterling (GBP);
• All tenors of Japanese yen (JPY); and
• Overnight, 1-week, 2-month, and 12-month U.S. dollar (USD).

 

Bank of America has transitioned many different types of products to alternative reference rates (ARRs), such as loans, mortgages, OTC and exchange-traded derivatives, structured notes, and other securities, including certain securities issued by Bank of America. 

 

Transition to ARRs has been achieved through various means, including, but not limited to:

 

• Application of benchmark-rate fallback language within contracts, including those amended through adherence to relevant ISDA protocols;
• Bilateral amendment of benchmark rate provisions in contracts;
• Conversion processes conducted by central clearing counterparties; and
• Utilization of legislative solutions to replace LIBOR in “tough legacy” contracts, such as the Adjustable Interest Rate (LIBOR) Act in the United States.

 

The FCA has compelled IBA to continue to publish the 1-month, 3-month, and 6-month settings of USD LIBOR and the 3-month setting of GBP LIBOR on a non-representative, synthetic basis to support transition of legacy contracts. Publication of the 3-month synthetic GBP LIBOR setting will cease after March 28, 2024, and the FCA intends for publication of all synthetic USD LIBOR settings to cease after September 30, 2024.

 

The methodology by which IBA is required to calculate these synthetic rates is as follows: the forward-looking term versions of the relevant risk-free rate (i.e., the ICE Term SONIA Reference Rate provided by IBA for GBP and the CME Term SOFR Reference Rate for USD), plus the respective ISDA fixed spread adjustment (as published for the purpose of ISDA’s IBOR Fallbacks for those settings).

 

The FCA has made it clear that the use of synthetic GBP LIBOR or synthetic USD LIBOR is only to assist holders of legacy contracts that are challenging to modify (often referred to as “tough legacy” contracts) in transitioning away from those settings.  Further, the FCA’s authority to mandate publication of synthetic LIBOR is temporary. Accordingly, should a contract or product utilize synthetic GBP or USD LIBOR, such contract or product will still need to transition to an ARR.

 

• Consistent with regulatory expectations, Bank of America is focused on actively transitioning legacy LIBOR contracts utilizing synthetic LIBOR to ARRs.

The following chart provides ARRs that various working groups have identified and recommended across five major jurisdictions. 

 

Beyond LIBOR, administrators for certain other benchmark rates have ceased or modified, or have announced their intention to cease or modify, such benchmark rates. For example, the administrator of the Canadian Dollar Offered Rate (CDOR) has indicated that publication of all tenors of CDOR will permanently cease following June 28, 2024. Further, similar announcements on other benchmark rates could be made in the future.

 

In addition, similar to what was done during LIBOR transition efforts, there is now a practice of issuing so-called “stop-sell” guidance after a specified date (e.g., an expectation on the part of an applicable regulator that its regulated entities will cease new use of that benchmark) to promote a smooth transition away from a benchmark prior to its cessation.

 

For financial products referencing benchmarks that are ceasing or otherwise changing, the impact can vary across different types of products, and even between transactions in the same type of product. Additionally, affected benchmarks may be discontinued on differing schedules.

 

Some financial products that may be impacted by benchmark reform include:

 

• Loans
• Mortgages
• OTC Derivatives
• Exchange-Traded Derivatives
• Securitizations
• Floating Rate Notes (FRNs)

 

This list is indicative and not fully exhaustive. Other financial products may also be affected indirectly due to changes in discounting curves or pricing.

 

Bank of America continues to identify, assess, and monitor risks associated with the discontinuation or unavailability of other non-LIBOR benchmarks and the transition to ARRs. We continue to evaluate existing contracts across all products to determine the impact of the discontinuation of benchmarks and to assess and implement changes to those contracts.

 

Bank of America is committed to working closely with our clients to promote awareness of changes to benchmarks, take into consideration client concerns, support markets, and provide solutions to our clients. Bank of America is also committed to participating in the work of global regulators, industry working groups, and trade associations aimed at supporting a smooth transition away from impacted benchmarks to ARRs.

 

It is important that clients review and understand the governing terms of their financial products. Clients should analyze the effect of cessation or other modifications impacting benchmark rates. For further guidance, please consult with your legal, tax, financial and other professional advisors.

More information can be found in Bank of America’s most recent Form 10-K and subsequent periodic reports filed with the Securities and Exchange Commission. Additional information on the potential impact of the transition to ARRs on your investments and transactions can be found in Bank of America’s Benchmark Rate Transition Statement. Below are additional resources on benchmark reform:

 

Central Banks & Working Groups:

US:

Federal Reserve Bank of New York (FRBNY) - Alternative Reference Rate Committee (ARRC)

 

UK:

Bank of England - Working Group on Sterling Risk Free Rates

 

EU:

European Central Bank (ECB) - Working Group on Euro Risk Free Rates

 

SWITZERLAND:

Swiss National Bank - National Working Group on Swiss Franc Reference Rates

 

JAPAN:

Bank of Japan (BOJ) - Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks

 

 

Industry Bodies:

International Swaps and Derivatives Association (ISDA)

International Capital Market Association (ICMA)

UK Finance

Loan Market Association (LMA)

Loan Syndications and Trading Association (LSTA)

Asia Pacific Loan Market Association (APLMA)

Treasury Markets Association (TMA)

Japanese Bankers Association (JBA)

 

Official Sector:

Financial Stability Board (FSB)

International Organization of Securities Commissions (IOSCO)

Financial Industry Regulatory Authority (FINRA)

U.S. Commodity Futures and Trading Commission (CFTC)

U.S. Securities and Exchange Commission (SEC)

U.K. Financial Conduct Authority (FCA)

Hong Kong Monetary Authority (HKMA)

Monetary Authority of Singapore (MAS)

 

The above resource links are not affiliated with Bank of America or any of its affiliates and are provided for information and educational purposes only. Any opinions and/or views expressed do not necessarily reflect the opinions and/or views of Bank of America or any of its affiliates.