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10-09-2021

The end of the London Interbank Offered Rate (LIBOR)

Publications | Dieter Veestraeten / Nicolas Michiels

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Following the widely known LIBOR-scandal, the LIBOR and similar interest rates will disappear from the scene as of 1 January 2022, and will be replaced by risk-free interest rates (RFR’s).

The LIBOR is intertwined with the interbank money market, i.e. the market on which banks lend money to one another, but also with financial transactions which have an underlying value of more than $ 300 trillion.

This interest rate is the average rate at which a large number of international London-based banks are willing to lend money to one another. Although the LIBOR is calculated multiple times a day, the ICE Benchmark Administration (IBO) publishes the official LIBOR rates daily at 11:45 a.m. (UK time). Previously, this was done by the British Bankers’ Association (BBA).

The LIBOR rates differ from one another in maturity and currency. In the past, ten different currencies were used, and a total of fifteen maturities existed for each currency. However, in 2013, the BBA reduced both factors to five currencies and eight maturities. The remaining currencies are the Euro (EUR), US dollar (USD), British pound sterling (GBP), Japanese Yen (JPY), and Swiss franc (CHF). The maturities range from one day (overnight) to twelve months.

The end of LIBOR will affect both Belgian and international lending practices. This appears from, among other, the detailed information made available by the Loan Market Association (LMA). For example, withdrawable loans in USD and/or GBP will have to be remunerated on the basis of the relevant RFR instead of the LIBOR. In such case, the relevant RFR’s will be the Sterling Overnight Index Average (SONIA) for GBP and the Secured Overnight Financing Rate (SOFR) for USD. It follows that banks around the world will have to make the necessary arrangements in light of the abolition of LIBOR.

Regarding the euro, the Working Group on Euro Risk-Free Rates has developed the so-called €STR. The €STR reflects the rate for unsecured overnight euro loans between banks in the Eurozone. However, the currently used Euro Interbank Offered Rate (EURIBOR) will be upheld in the coming years. Hence, loans in euro will be less affected by the abolition of LIBOR. The Working Group does encourage parties to include a “fall-back” provision in their euro-denominated credit agreement. That way, it is possible to replace the EURIBOR by the €STR if the EURIBOR were to be abolished in the future.

Do not hesitate to contact us through e-mail (dve@astrealaw.be) if you have any further questions on this topic.

Dieter Veestraeten & Nicolas Michiels