Benchmark rates, also known as interest rate benchmarks and reference rates, are used in various different types of financial products and contracts and reflect what it costs for banks to borrow from each other. Traditionally benchmark rates are determined by using expert judgment of a contributing panel of banks and calculated and published daily by an independent industry body. Benchmark rates are used selectively by banks in some but not all products and services. Bank of Ireland tends to use benchmarks such as the London Interbank Offered Rate (“LIBOR”) and Euro Interbank Offered Rate (“EURIBOR”) in business or corporate transactions as well as bank to bank transactions.
Since 2014, financial institutions worldwide have been progressively moving towards replacing or reforming benchmark rates in what is known as Benchmark Reform.
The EU Benchmarks Regulation, which came into effect across the EU on 1 January 2018, supports the reform process, introducing a common framework and consistent approach to benchmark regulation across the EU. It requires EU financial institutions to have robust plans in place covering their usage of benchmarks, including clear fall-back mechanisms, should the benchmark be unavailable for any reason.
Benchmark reform consists of the introduction of new benchmark rates, which will ultimately replace certain existing rates, as well as the reform of other existing benchmark rates which will continue to be used once reformed to be compliant with the EU Benchmark Regulation.
New benchmark rates are designed to be Risk Free Rates (“RFRs”) and largely based on actual transactions with minimal reliance on expert judgment from contributing banks.
Reformed rates, such as EURIBOR, now use an updated methodology to comply with EU Benchmark Regulation.
As a result, new and reformed benchmarks will be more transparent and reliable.
Bank of Ireland’s Transition Preparations
Financial institutions including Bank of Ireland are preparing for the transition to new benchmarks:
The European Money Markets Institute (“EMMI”), the administrator of EURIBOR, has updated its methodology to be compliant with regulatory requirements (EU Benchmarks Regulation) and will be available beyond 2021 to support EURO transactions or products. Bank of Ireland continues to use EURIBOR in its products and services.
The UK regulator, the Financial Conduct Authority (“FCA”), has indicated that banks should not rely on LIBOR being published after the end of 2021. Replacement rates for existing LIBOR products will be available ahead of that date. Sterling Overnight Indexed Average (“SONIA”) is expected to replace GBP LIBOR in global wholesale financial markets by end of 2021.
The FCA, Bank of England (“BoE”) and the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) released updated milestones for the transition of LIBOR in advance of the end of 2021 deadline along with recommended replacement rates for commonly used products. We are working towards adapting our products to meet those milestones.
In the US, the Alternative Reference Rates Committee (ARRC) selected SOFR as its recommended alternative to USD LIBOR.
The benchmarks most applicable to Bank of Ireland are EURIBOR, Euro Short Term Rate (“€STR”), SONIA and Secured Overnight Financing Rate (“SOFR”).
If we are transacting products or services with you that are impacted, we will let you know and also bring your attention to revised terms and conditions to protect you and your product from possible changes due to Benchmark Reform. If you have any queries please talk to your Bank of Ireland Relationship Manager or get in touch at Benchmarkinfo@boi.com.
The following are some questions and answers that will help you understand Benchmark Reform and how it might impact any products you hold or transact in with Bank of Ireland. We have also included some links to external websites where you can find out more about Benchmark Reform.
Benchmark rates are set by a panel of banks who each submit the rates at which they would offer to lend unsecured interbank money (money being lent from one bank to another) for different periods and for a number of currencies. Using a defined method, an average of the rates submitted by contributors is calculated and the benchmarks such as LIBOR or EURIBOR are made publically available daily by an appointed administrator.
Benchmark rates have been fundamental to interest rate markets for decades and banks can choose to use these in the pricing of their products and services. In Bank of Ireland benchmarks are generally used in business and corporate loans and financial products and the most commonly used benchmarks are LIBOR and EURIBOR.
The financial crises in late 2008/2009 highlighted liquidity and reliability issues with LIBOR benchmarks and caused regulatory bodies to scrutinise how benchmarks are set and administered.
Since 2014, financial institutions worldwide have been progressively moving towards replacing or reforming benchmark rates in what is known as Benchmark Reform. In 2019, EURIBOR reformed its methodology to be compliant with regulatory requirements and can continue to be used. However it has been announced that continuity of LIBOR rates cannot be guaranteed past the end of 2021.
Some existing benchmarks will be replaced and the replacement benchmarks or Risk Free Rates (RFRs) differ from traditional benchmark rates in that they are designed to be based on actual transactions, with minimal reliance on expert judgment from contributing banks. These new rates will replace traditional benchmarks such as LIBOR for interest rate-linked products, and financial instruments, such as fixed income securities, loans and derivatives.
Although the final date for reliance on current benchmarks is 31 December 2021, we want to let customers know that reform is underway and how it may impact on your financial requirements and products. Although benchmark reform is not applicable to all of our products or every customer, where it is applicable, we need to start planning for a smooth transition to new rates when required.
If you have existing products with us that are impacted we will be in touch with you well before the end of 2021.
Benchmark rates are most common in banking products used by business or large corporate customers, for example, for some business loans the overall interest rate applicable to the loan would be determined by using a benchmark rate plus the Bank’s lending margin. Commonly used impacted benchmarks in Bank of Ireland are GBP LIBOR and USD LIBOR rates.
EURIBOR has updated its methodology to be compliant with regulatory requirements and will be available beyond 2021. However, customers using LIBOR rates will need replacement rates for maturities beyond 2021. We are working on determining replacement rates based on industry and regulatory guidance and plan to know what these rates are in the coming months and well before the deadline of 2021. We expect to communicate directly with customers in mid 2020 but please feel free to talk to your relationship manager if you require any information in advance of this.
In addition to loans, customers who use interest rate swaps or derivatives for risk management purposes will be impacted by this reform for any transaction maturing beyond 2021. Your relationship manager will support you in the transition to replacement rates.
If you have a benchmark product with a maturity before 31 December 2021 there should be no impact.
Interest rates on Bank of Ireland Variable Rate Mortgages provided to personal customers (i.e. customers who are not business banking or corporate banking customers) are set by Bank of Ireland at its discretion and will NOT be impacted by Benchmark reform. The factors that the Bank considers when setting its variable rates are detailed in our Variable Rate Policy Statement which is available on our website at BOI.com/mortgages or from any branch of the Bank.
Bank of Ireland Tracker mortgage loans use the ECB Repo rate which is also NOT impacted by Benchmark Reform.
The industry and financial markets have so far only established new Risk Free Rates in overnight markets. For example, US Dollar and Sterling have new Risk Free Overnight rates, USD Secured Overnight Financing Rate (“SOFR”) and reformed Sterling Overnight Index Average (“SONIA”) and the EURO equivalent is Euro Short Term Rate (“€STR”).
Overnight rates are not generally used in customer products due to the complexity of interest calculation. Normally customer products are priced on TERM benchmarks, e.g. 1 month, 3 month or 6 month rates. The market has not yet established replacement TERM rates and therefore we do not have a like for like alternative yet and cannot start to transition existing products.
It is hoped that there will be more clarity on replacement TERM rates in early 2020 and we will update this information as soon as we know.
There is no need for you to do anything just yet. If we are transacting products or services with you that are impacted, we will let you know and also bring your attention to revised terms and conditions to protect you and your product from possible changes due to Benchmark Reform.
If you have a product maturing after 2021, we want to make you aware that some changes are anticipated and as soon as we have clarity on replacement rates we will be in touch directly with you.
As we await industry development and clarification on replacement rates for customer products our priority is to ensure that we support you and your business through Benchmark Reform. If you would like to know more please get in touch with your relationship manager or send us an email on Benchmarkinfo@boi.com.