RBI asks banks to prepare for transition from LIBOR
IANS
09 July 2021
In August last year, the RBI requested banks to frame a Board approved plan, outlining an assessment of exposures linked to LIBOR and the steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the Alternative Reference Rates (ARR).
Banks and financial institutions are encouraged to cease, and also encourage their customers to cease, entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted ARR (Alternative Reference Rates), as soon as practicable and in any case by December 31, 2021, an RBI circular said on Thursday.
RBI asks banks to prepare for transition from LIBOR
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RBI to banks: Phase out Libor soon, move to alternative reference rates
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The secured overnight financing rate will become the main replacement for Libor in US financial markets, according to a number of experts speaking at the International Swaps and Derivatives Association’s annual general meeting, despite the emergence of some alternative lending rates.
The development of the SOFR market in the US has been slow, with interest-rate swaps tied to the new reference rate making up less than 2% of US trading volumes, according to data from IHS Markit, compared to over half of sterling swap trading volumes being linked to the UK s sterling overnight index average, or Sonia.
US loan markets, in particular, have been reluctant to move away from Libor and some borrowers are exploring the use of credit-sensitive reference rates instead of SOFR, which is virtually risk-free.