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 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.

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 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, 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 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 indicated that banks should not rely on LIBOR being published after the 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 a useful guide on recommended replacement rates for commonly used products. SONIA is expected to replace Sterling LIBOR in global wholesale financial markets by the end of 2021.To meet these milestones:

  • As of 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 are available customers. The rates available will differ depending on customer requirements and product type. These rates may be drawn from the Bank’s existing product suite or be based on SONIA. If a customer wishes to avail of Sterling LIBOR pricing after this date, terms and conditions that can accommodate the future switch from LIBOR to an alternative rate by the end of 2021 must be included. Your relationship manager will be in touch in the coming months to discuss the options available to you on transition.
  • From 1st April 2021, Sterling LIBOR linked products and loans will no longer be offered by Bank of Ireland.
  • You will note from the BOE guidance that SONIA is likely to be used by the large corporate market and smaller value products or SME loans are likely to move to other alternative rates.

US Dollar LIBOR

In the US, the Alternative Reference Rates Committee (ARRC) selected SOFR as its recommended alternative to US Dollar LIBOR, and has released milestones to be reached in advance of the end of 2021 deadline. To deliver against these milestones, Bank of Ireland:

  • Now offers alternative Dollar products as of 1st October 2020. These products may be drawn from the Bank’s existing product suite, or may be based on SOFR.
  • Will no longer offer Dollar LIBOR linked products after 1st July 2021.

If you have Sterling or Dollar LIBOR linked contracts that extend beyond 2021, Bank of Ireland will engage with you in the coming months to amend your products and contractual terms and conditions to facilitate transition away from LIBORs. Replacement rates offered will be drawn from the Bank’s existing product suite or will be based on 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 about Benchmark Reform.

  • What are Benchmark Rates?

    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.

  • 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 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.

  • Why are you telling me about it now?

    Although the final date for reliance on current benchmarks is 31 December 2021, 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. Replacement products for Sterling LIBOR need to be available from October 1st 2020, and after March 31st 2021 Sterling LIBOR can no longer be used for new products. Following this, US Dollar LIBOR cannot be used for new products after June 31st 2021. For this reason you will notice that as of 1st October 2020, Sterling and US Dollar products based on LIBOR are no longer freely available and have been replaced by alternative products drawn from the Bank’s existing product suite or based on risk-free rates.

    Benchmark reform is not applicable to all of our products or every customer. Where it is applicable, we are planning for a smooth transition to new rates in advance of end of 2021. Other than Sterling and US Dollar 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 plan to be in touch with you in early 2021 to discuss the transition options with you.

  • 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 as of October 1st 2020, new LIBOR products are no longer freely available. 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 using LIBOR linked products maturing in 2022 and beyond will need to transition to replacement rates prior to the end of 2021 and we will be in touch with all impacted customers in early 2021 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.

  • Why can we not just move customers to these new Risk Free Rates now?

    The industry and financial markets have so far only established new Risk Free Rates in overnight currency markets. For example, US Dollar and Sterling have new Risk Free Rates (‘‘RFRs’’), Secured Overnight Financing Rate (“SOFR”) and reformed Sterling Overnight Index Average (“SONIA”). The EURO equivalent is Euro Short Term Rate (“€STR”). RFRs are not suitable for all customer or product types as outlined in the guidance published by the Bank of England. 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.

    As we await further clarity, replacement rates available to customers will include fixed rates and Central Bank rates. It is hoped that there will be more clarity on replacement term rates in mid-late 2020 and we will update this information as soon as we know more.

    In the meantime, alternative replacement rates are available to customers as of 1st October 2020. We will initially replace LIBOR in new products and following this, in early 2021, we will contact customers with existing LIBOR products about the replacement rate options and transition mechanisms available to them.

    EURIBOR has been reformed to meet regulatory requirements so customers with EURIBOR products will not have to move to a different rate.

    If you have any queries, please get in touch at benchmarkinfo@boi.com

  • What happens next?

    As of October 1st 2020, alternative rates to Sterling and US Dollar LIBOR are now available to customers. Products are drawn from the Bank’s current product suite, or based on risk-free rates. If you wish to enter into a LIBOR contract after this date, terms and conditions that can accommodate the future switch to an alternative rate by the end of 2021 must be included.

    If you have a product maturing after 2021, we will contact you to ensure that contract terms and conditions are adequate to allow for potential changes or impacts resulting from Benchmark Reform. If required, contracts will be updated to facilitate a move to a replacement rate to ensure continuity of the contract past 2021. There is no need for you to do anything just yet.

    Bank of Ireland will guide you through the Benchmark Reform and transition impacts as they relate to your products and specific requirements. We will also bring your attention to revised terms and conditions to protect you and your product from possible changes due to 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

  • If you would like more information