RBI Advises Banks To Stop Libor-Linked Contracts Latest By December

A pedestrian walks past the Reserve Bank of India (RBI) in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Advises Banks To Stop Libor-Linked Contracts Latest By December

The Reserve Bank of India has advised banks to speed up their transition away from contracts linked to the London Interbank Offered Rate or Libor.

In an advisory issued on Thursday, the regulator said that banks and financial institutions should stop entering into Libor-linked contracts "as soon as practicable" and latest by Dec. 31, 2021.

The transition away from Libor began after it was found to have been manipulated for years. The Intercontinental Exchange, the authority responsible for Libor, said it will stop publishing one-week and two-month U.S. Dollar Libor after Dec. 31, 2021, while rates for the remaining tenors will be discontinued after June 30, 2023.

In its advisory, the RBI said:

  • Banks, financial institutions should stop entering into Libor-linked contracts by Dec. 31, 2021.

  • Banks urged to incorporate fallback clauses in all contracts referenced to Libor.

  • Banks advised to cease using the Mumbai Interbank Forward Outright Rate (Mifor), by Dec. 31, 2021.

  • Contracts referencing Libor/Mifor may be undertaken after Dec. 31, 2021 only for the purpose of managing risks arising out of Libor/Mifor referenced contracts.

The regulator also asked lenders to push clients to move away from Libor as a benchmark and instead use any widely accepted alternative reference rate.

With the objective of orderly, safe and sound LIBOR transition and considering customer protection, reputational and litigation risks involved, banks/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, as soon as practicable and in any case by December 31, 2021.
RBI Advisory

Globally, $260 trillion in contracts are linked to Libor. In India, the Reserve Bank of India estimated the country’s Libor exposure at $331 billion in its November monthly bulletin.

Given, the volume of contracts tagged to the benchmark, the RBI also asked banks and financial institutions to undertake a comprehensive review of all direct and indirect Libor exposures. A framework to mitigate risks arising out of the transition from such exposures on account of transitional issues including valuation and contractual clauses should be put in place, the regulator said.

"The Reserve Bank will continue to monitor the evolving global and domestic situation with regard to the transition away from LIBOR and proactively take steps, as necessary, to mitigate associated risks in order to ensure a smooth transition."

However, given almost 90% of all the existing contracts are referenced to U.S. dollar Libor in India, banks and financial institutions have time till June 30, 2023 to replace them with alternative reference rates, said Kuntal Sur, partner and leader-financial risk and regulations at advisory firm PwC India. "Therefore, a big disruption in the market is not expected as the 2023 deadline is quite convenient and gives the market adequate time to replace all existing contracts referenced to Libor."

In April, BloombergQuint reported that the transition away from Libor has been slow so far. Indian banks, non-bank lenders and corporates are finding themselves at different stages of transition.

While some have started work to meet the December-end deadline, others are yet to begin the process. A majority are in the initial stages of shifting existing and new contracts to alternative reference rates or ARRs that will replace Libor.

“All new contracts will need to use ARRs or Modified-Mifor as benchmarks starting January 2022. To that end, both technology vendors and top banks and financial institutions are progressing well," Sur said. "While there may be some who are still in early stages, large banks seem preparing well for the transition.”

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