Background to Benchmark Reform

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 the expert judgment of a contributing panel of banks and are 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 has historically tended 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.

Benchmark Reform involves the introduction of new alternative reference rates to replace certain existing benchmark rates as well as the reform of other existing benchmark rates to become compliant with the EU Benchmarks Regulation.

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 fallback mechanisms, should the benchmark be unavailable for any reason.

New benchmark rates are designed to be Risk Free Rates (“RFRs”) and are largely based on actual transactions with minimal reliance on expert judgment from contributing banks.

In Europe, EURIBOR’s methodology was reformed in 2019 (“Reformed rates”) to comply with EU Benchmarks Regulation.

As a result of the changes, new and reformed benchmarks will be more transparent and reliable.

Bank of Ireland’s Transition Preparations

Financial institutions including Bank of Ireland are now moving to transition to new benchmarks in advance of the regulatory deadlines. The new or reformed benchmarks most applicable to Bank of Ireland are EURIBOR, Euro Short Term Rate (“€STR”), Sterling Overnight Indexed Average (“SONIA”) and Secured Overnight Financing Rate (“SOFR”).

EURIBOR

The European Money Markets Institute (“EMMI”), the administrator of EURIBOR, has updated its methodology to be compliant with regulatory requirements (EU Benchmarks Regulation) and it will be available beyond 2021 to support EURO transactions or products. Bank of Ireland will continue to use EURIBOR in its products and services as long as the underlying market remains liquid.

€STR

The recommended RFR for EURO is the Euro Short Term Rate (€STR) administered by the European Central Bank. €STR reflects the wholesale euro unsecured overnight borrowing costs of banks located in the euro area.

Sterling LIBOR

The UK regulator, the Financial Conduct Authority (“FCA”), has announced on 5th March 2021 that all tenors of Sterling LIBOR will either cease to be provided or no longer be representative after 31st December 2021 and therefore can no longer be relied upon for use in loan and derivative markets. Please see here for link to the announcement.

In advance of the pre cessation announcement, the FCA, the 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 2021 year-end deadline along with a useful guide on recommended replacement rates for commonly used products. SONIA is to replace Sterling LIBOR in global wholesale financial markets by the end of 2021. To meet these milestones Bank of Ireland has taken the following steps:

  • Since 1st October 2020, Sterling LIBOR linked products that mature beyond 2021 no longer form part of the Bank’s standard product offering, and alternative rates have been made available to customers since then.
  • Since 1st April 2021, new Sterling LIBOR linked products and loans are no longer offered by Bank of Ireland. The alternative rates available differ depending on customer requirements and product type. These products may be drawn from the Bank’s existing product suite which now includes SONIA. If your product is affected, your relationship manager or another member of staff from Bank of Ireland will be in touch to discuss the options available to you on transition.
  • In general, and in line with the BOE guidance, SONIA is being used by the large corporate market and smaller value products or SME loans are generally moving to other alternative rates. All tenors of Sterling LIBOR will no longer be representative after 31st December 2021. If you have Sterling LIBOR linked contracts that extend beyond end 2021, Bank of Ireland should have been in contact with you to amend your products and contractual arrangements to facilitate transition away from LIBOR. Replacement rates offered are drawn from the Bank’s existing product suite or are based on risk-free rates.

US Dollar LIBOR

The UK regulator, the Financial Conduct Authority (“FCA”) announced on 5th March 2021 that the LIBOR settings for US dollar will either cease to be provided or no longer be representative after:

  • 31st December 2021 for the 1 week and 2 month US Dollar settings
  • 30th June 2023 for the remaining US dollar settings.

In the US, the Alternative Reference Rates Committee (ARRC) selected SOFR as its recommended alternative to US Dollar LIBOR. The US regulator, the Fed, has set out recommended transition guidance, which states that new issuance of US Dollar LIBOR instruments should stop as soon as practicable and in no case later than the end of 2021. To deliver against this guidance, Bank of Ireland:

  • Offers alternative US Dollar products since 1st October 2020. These products may be drawn from the Bank’s existing product suite or may be based on SOFR.
  • Bank of Ireland will cease issuing USD LIBOR for new contracts by end of 2021. This is in line with current regulatory guidance.

The cessation date for the 1 week and 2 month tenors of US Dollar LIBOR is 31st December 2021. The next step is for Bank of Ireland to transition US Dollar LIBOR 1 week and 2 month tenors onto alternative rates. Bank of Ireland will be reaching out to customers to transition in advance of the regulatory deadlines. If you have US Dollar LIBOR linked contracts referencing these tenors that extend beyond 2021, we will engage with you to arrange a transition to an alternative rate.

The FCA announcement means that certain tenors of US Dollar LIBOR (overnight, 1 month, 3 month, 6 month and 12 month) will continue to be published until 30th June 2023. As a result, if you have US Dollar LIBOR linked contracts using these tenors that extend beyond 2021, they will remain unaffected for the moment and Bank of Ireland will engage with you in advance of June 2023 to amend your products and contractual arrangements to facilitate a transition away from US Dollar LIBOR. Replacement rates offered are drawn from the Bank’s existing product suite or are based on the new risk-free rates. 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 with Bank of Ireland. We have also included some links to external websites where you can find out more information about Benchmark Reform.

  • What are Benchmark Rates?

    Benchmark rates are regularly updated interest rates that are publicly accessible. They 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. Historically, the most commonly used benchmarks by the Bank were LIBOR and EURIBOR.

  • What is Benchmark Reform?

    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, the Financial Conduct Authority in the UK have stated that most LIBOR rates will not be representative beyond the end of 2021, at which point LIBOR can no longer be used.

    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.

  • Why are you telling me about it now?

    We want to let customers know that reform is underway and that it may impact on your financial requirements and products.

    In early 2020, Industry and Regulatory Authorities set dates after which LIBOR rates can no longer be offered for new products. As a result of the milestones set, replacement products for Sterling LIBOR have been available since the 1st October 2020, and Sterling LIBOR has not been offered for new products since 31st March 2021.

    Bank of Ireland will not be offering new products based on US Dollar LIBOR after 31st December 2021, in line with current regulatory guidelines which state that issuance of new LIBOR products should stop as soon as practicable.

    Benchmark reform is not applicable to all our products or to every customer. Where it is applicable, we are moving towards a smooth transition to alternative rates in advance of the applicable cessation deadlines. Other than LIBOR products, our full range of products and services will continue to be available.

    For customers with existing LIBOR products maturing in 2022 and beyond, we will be in touch with you to discuss the transition options available to you.

  • What are the key differences between IBORs and the new alternative reference rates (risk free rates / RFR’s)?

    RFRs differ from IBORs in that they:

    • are overnight rates;
    • do not currently have a term structure as the IBORs do i.e. 1 month, 3 month, 9 month etc.;
    • are based on actual transactions from the previous day; and
    • have minimal reliance on expert judgement.
  • Could this impact me?

    Benchmark rates are most common in banking products used by business or large corporate customers. As an 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 Sterling LIBOR and US Dollar LIBOR rates.

    EURIBOR has updated its methodology to be compliant with regulatory requirements and will be available beyond 2021 so there will be no impact for customers with EURIBOR products.

    If you are a customer who has traditionally used LIBOR pricing, you need to be aware that since 1st April 2021, new LIBOR products are no longer offered by Bank of Ireland. Replacement rates available to customers include fixed rates, rates based on term structures, Central Bank rates such as the Bank of England base rate or risk-free rates. The Bank of England published a useful guide to recommend replacement rates.

    Customers currently using Sterling LIBOR linked products or US Dollar LIBOR linked products based on the 1 week or 2 month tenors maturing in 2022 and beyond will need to transition to replacement rates prior to the end of 2021. Customers using US Dollar LIBOR linked products applying the other tenors (overnight, 1 month, 3 month, 6month, 12 month), maturing beyond 30th June 2023 will need to transition to replacement rates before this date.

    We will be in touch with all impacted customers to discuss the options available to you. In addition to loans, customers who use interest rate swaps or derivatives for risk management purposes will be impacted by this reform. Your relationship manager will support you in the transition to replacement rates.

    As always, if you would like to discuss this please do not hesitate to contact your relationship manager or email us on benchmarkinfo@boi.com

  • Are Variable Rate Mortgages provided to personal customers (i.e. customers who are not business banking or corporate banking customers) impacted?

    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.

  • What happens next?

    Since 1st October 2020, alternative rates to Sterling and US Dollar LIBOR have been available to customers. Products are drawn from the Bank’s current product suite or based on new risk-free rates. Since April 1st, LIBOR cannot be used in new Sterling products and alternative pricing is available. The next step is for Bank of Ireland to transition all Sterling LIBOR and US Dollar LIBOR 1 week and 2 month tenor customers onto alternative rates. Bank of Ireland will be reaching out to customers to transition in advance of regulatory deadlines. If you have a Sterling Loan using LIBOR maturing after 2021 you will need an replacement rate. If you are not in receipt of communication from us in this regard please contact us as soon as possible on benchmarkinfo@boi.com so that the appropriate action can be taken.

    If you have existing LIBOR contracts outlined below, a future switch to an alternative rate by the applicable cessation date (end-2021 or 30th June 2023 depending on currency and tenor) is required:

    • Sterling LIBOR linked product maturing after 2021 or
    • US Dollar LIBOR linked product using the 1 week or 2 month tenors maturing after 2021, or:
    • US Dollar LIBOR linked products using the overnight 1 month, 3 month, 6 month and 12month tenors, maturing beyond 30th June 2023

    Be assured that we will contact you to ensure that contract terms and conditions are adequate to allow for potential changes and support you in this transition. If you are not in receipt of communication from us in this regard please contact us as soon as possible on benchmarkinfo@boi.com so that the appropriate action can be taken.

  • If you would like more information