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LIBOR reference rate and benchmarks reform – important information

LIBOR reference rate and benchmarks reform – important information

Please see below important information about LIBOR reference rate and additional information about benchmarks reform:

1. Cessation of providing some of LIBOR benchmarks

Please be advised that on March 5th this year, the British Financial Conduct Authority (FCA) announced that it will completely cease to provide benchmarks such as LIBOR CHF and LIBOR EUR – at the end of 2021 (all tenors) and LIBOR GBP and LIBOR JPY (certain tenors) – end of 2021 and USD LIBOR (certain tenors) – effective June 30, 2023. Therefore, appropriate measures are being urgently taken on individual markets to implement relevant solutions, including market standards, EU-level legislative acts, and to develop alternative indices that could replace the existing LIBOR rates. Efforts to develop alternative indices are also being made with regard to certain non-LIBOR benchmarks for interest rates calculated on the basis of rates applicable to interbank transactions (Interbank Offered Rates / “IBOR”).

Regulators, supervisors, market organizations and associations have undertaken a series of initiatives to develop alternative indices that could replace LIBOR for individual currencies. Such work is also being carried out for interest rate benchmarks other than LIBOR. The alternative benchmarks being currently developed are identified as nearly risk-free rates (“RFR”).

It should be noted that RFR characteristics differ from the previous IBOR indices, e.g. in that they are typically overnight rates and are published after the period to which they pertain (“backward-looking”). Also, RFRs are calculated on a different basis than IBOR indices, therefore, they should not be considered an equal replacement for IBORs. To illustrate the above, here are some examples of the differences between LIBOR and RFR:

  • LIBOR is a reference rate quoted for specific tenors – O/N, 1W, 1M, 2M, 3M, 6M, 12M, while RFRs are usually overnight rates.
  • LIBOR is a rate published at the beginning of a given (interest) period/tenor (forward-looking), while RFR is usually quoted after the period it pertains to (backward-looking rate).
  • LIBOR includes the bank's credit risk and liquidity components. RFRs may differ in terms of their characteristics and components, but as a rule they contain little or no element of the institution’s credit risk or liquidity.

Given the differences mentioned above, it is necessary to consider that the alternative RFR benchmark, which would be used in place of IBOR, may require an appropriate amendment to adjust for the economic effects, i.e. reduce or eliminate changes in the economic value, of IBOR replacement (“adjustment”, “adjustment spread”). Methodologies to calculate the adjustment are developed, among others, by relevant market associations, e.g. ISDA (International Swap Dealers Association) or directly stated in the contract documents.

Please see below a table of RFRs that have been identified by supervisors, regulators and certain working groups as potential alternative benchmarks or solutions alternative to LIBOR and certain IBORs. The table features additional information about individual rates. The solutions being developed for each of the existing IBOR indices and potential RFR-type alternatives may be at different stages of advancement.

2. EONIA reference rate

In this communication, we also wish to refer to EONIA which is an overnight reference rate established for the Euro. In the case of EONIA, the Working Group for Euro Risk Free Rates, after verification and public consultation, recommended to market participants that EONIA be gradually replaced with a new short-term index (“EuroSTR”) available since 2 October 2019. Until 2 October 2019, EONIA was calculated by the European Central Bank (“ECB”) and administered by the European Money Markets Institute (“EMMI”) as a weighted average of all overnight unsecured interbank lending transactions. Since 2 October 2019, EuroSTR has been available and EONIA is determined as EuroSTR plus a fixed spread of 8.5 basis points (“bps”). This calculation methodology is to be continued until EONIA is no longer published. The EMMI has already announced its plans to discontinue publication as of 3 January 2022.

3. Regulation (EU) 2021/168 of the European Parliament and of the Council of 10 February 2021

In addition, please be advised that 12 February 2021 saw the publication of Regulation (EU) 2021/168 of the European Parliament and of the Council of 10 February 2021 amending Regulation (EU) 2016/1011 as regards the exemption of certain third-country spot foreign exchange benchmarks and the designation of replacements for certain benchmarks in cessation, and amending Regulation (EU) No. 648/2012, which, inter alia, introduces the basis for designating, under the conditions specified in the Regulation, by the European Commission or the competent national authority of a Member State, respectively, a statutory substitute for a reference index where the events specified in the above regulation have occurred.

With the above information in mind, we encourage you to follow news on reference rates, benchmarks reform, and to assess the impact of these changes on your business. Please be aware also that Citi Handlowy is currently working to prepare for the changes that may occur in this regard, an appropriate analysis of the application of relevant alternative RFRs is being carried out, as well as a number of other necessary efforts are being made to prepare correct processes at the Bank in this area.

The decision to phase out the LIBOR rates makes it necessary to select a new benchmark rate for those products. This means that all the existing products of Citi Handlowy that are based on these rates will have to be changed. Changes in those products can be made either under their existing contractual clauses or as a result of action by a (Polish or European) legislator, or by signing an amendment agreement to the existing agreement with the Bank. We will keep you informed of all the changes.

If you have any questions about the issues discussed in this communication, please contact Citi Handlowy Relationship Manager.

Update - The European Commission has appointed a replacement for the CHF LIBOR3M rate

Pursuant to the Commission Implementing Regulation (EU) 2021/1847 of October 14, 2021 on the designation of the statutory replacement for certain maturities of the LIBOR rate for the Swiss Franc (CHF LIBOR), as a replacement for the CHF LIBOR3M a 3-month SARON compound rate ((SAR3MC) ISIN CH0477123902) with a corrective spread (%) of 0.0031 was designated.

The full text of the Implementing Regulation can be found (here)