RBI tells banks/financial institutions to ensure complete transition away from LIBOR
the Reserve Bank of India A request from banks’ financial institutions to ensure that new transactions initiated by them or their customers are not dependent on or priced using US dollar LIBOR (London Interbank Offered Rate) or Mumbai Interbank Spot Forward Rate (MIFOR).
The above key message to banks and other RBI-regulated entities is part of an advisory emphasizing the need to take steps to ensure a complete transition away from LIBOR from July 1. The central bank said Financial Benchmarks India Pvt Ltd (FBIL) will stop publishing MIFOR after June 30.
Banks/financial institutions have been advised to take all necessary steps to ensure reserves are introduced as soon as possible in all remaining old financial contracts denoting USD LIBOR (including transactions denoting MIFOR).
The RBI said that banks/financial institutions are expected to have developed systems and processes to manage a complete transition away from LIBOR.
The Reserve Bank will continue to monitor the efforts of banks/financial institutions to ensure a smooth transition from LIBOR. the The central bank issued an advisory on the ‘LIBOR transition roadmap’ in July 2021, in which, among others, banks/financial institutions are encouraged to conduct transactions using Alternative reference price (ARR), as soon as reasonably practicable and in any case by December 31, 2021, and include robust provisional clauses in financial contracts linked to LIBOR.
the Complete transition from LIBOR It is considered a significant event in the global financial markets, which requires sustained attention from all stakeholders to mitigate operational risks and ensure an orderly transition, said the Reserve Bank of India.
financial crisis
The use of LIBOR came into question in the aftermath of the global financial crisis. Regulatory reviews have determined that shifts in the way banks finance their operations mean that LIBOR has increasingly been calculated on the basis of bank judgments from a panel of experts on borrowing costs, rather than actual transaction data, according to Bank of India Exim’s frequently asked questions on LIBOR shift.
Global regulators wanted interest rate standards to be based on actual transactions, rather than expert judgment, in order to be robust and reliable.
In 2017, the UK’s Financial Conduct Authority/FCA announced that the underlying markets, on which LIBOR was derived, were not active enough to offer a sustainable interest rate standard. It announced that it had secured commitments from banks to file a LIBOR order until the end of 2021, but would not expect to be forced to place orders after that date.
The FCA announced in March 2021 that all LIBOR settings would either cease to be presented by any administrator or would no longer be represented: Immediately after December 31, 2021, in the case of all GBP, EUR, CHF, JPY, and USD 1-week settings two months; and immediately after June 30, 2023, in the case of remaining settings in US dollars.