Risk Free Rates (RFR) like SOFR are essentially “backward looking” overnight interest rates derived from actual transactions which may be secured or unsecured. This is contrasted with LIBOR, which are published for different time periods (e.g., 3, 6, 12 months LIBOR) and are “forward looking”, i.e., published prospectively. Payments referencing RFRs are only known at the end of an accrual period while those referencing terms rates like LIBOR are known upfront at the start of an accrual period.

As such, RFRs are risk free because they neither include a term structure nor an interest offeror’s credit risk, both of which are factors in determining Term Rates.

Industry working groups around the world are exploring how RFRs may be used to replace the outgoing IBORs, including the use of such RFRs as possible fallbacks to existing products referencing such Term Rates.

DBS will be in touch at the appropriate juncture to update you on the alternative rates that will be used to replace LIBOR and existing IBORs, where applicable, in your existing products and services, when these alternative rates are finalised eventually.

DBS is actively engaged on various fronts to ensure a smooth transition away from IBORs (such as LIBOR), in line with the impending discontinuation of such rates.

As this transition is happening at a different pace in each jurisdiction, DBS is actively monitoring and where possible, participating in such initiatives.

Internally, DBS is adapting our products, systems and people to transition to the use of Risk Free Rates.

As the situation concerning this transition is still evolving and fluid, DBS is closely watching developments in this space and will, when appropriate, provide further updates on impact.

Assuming that there is no change to the cessation deadlines announced by the FCA, it is unlikely that IBORs such as LIBOR will continue to be used in existing products after the relevant cessation dates.

This is because IBORs such as LIBOR will cease to be published or will no longer be representative after the relevant cessation dates.

For other affected IBORs, working groups and regulators in various markets have also recommended milestones for cash products and derivatives respectively (where applicable), to cease the use of LIBOR and/or impacted IBORs.

You should therefore be prepared to shift towards the use of RFRs in respect of your existing or new products as soon as practicable.

“Any product using SOR and LIBOR as a reference rate will be affected. This could include derivatives, cash market products (e.g. business loans, syndicated loans, retail mortgages, floating rate notes, perpetual bonds and banks’ capital instruments), as well as outstanding debt securities with resettable interest rate features referencing SOR or LIBOR.

You should also review your existing financial documents and consider whether your investments and/or products (including loans) continue to serve their intended purpose.

If you had entered into certain transactions intending for them to serve as a hedge, DBS would like to remind you of the pre-existing basis risks in such transactions. Although such terms are already existing based on earlier instructed transactions and may not be directly impacted by the transition of SOR or LIBOR, you may wish to review your portfolio based on your individual circumstances. If in doubt, you may wish to seek independent advice as to whether there is any impact on each existing transaction as well as on your portfolio in its entirety."

Background

At the request of the Financial Stability Board’s Official Sector Steering Group and following several public consultations, the International Swaps and Derivatives Association (ISDA) published the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol (IBOR Fallbacks Protocol) on 23 October 2020 to facilitate the transition from LIBOR and other IBORs to RFRs, for legacy and new derivative trades. 

Mechanics of IBOR Fallbacks Protocol

The IBOR Fallbacks Protocol enables adhering parties to amend the terms of their legacy Protocol Covered Documents by introducing new fallbacks based on RFRs (Fallbacks Amendments) for LIBOR and other Relevant IBORs referenced in the Protocol Covered Documents. Please refer to the IBOR Fallbacks Protocol for the full list of Protocol Covered Documents and Relevant IBORs.

These fallbacks will be triggered upon permanent discontinuation of the Relevant IBOR and, in the case of LIBOR, when LIBOR becomes non-representative. 

Adhering to the ISDA Fallbacks Protocol 

The IBOR Fallbacks Protocol is now open for adherence via ISDA’s website. Please refer to the IBOR Fallbacks Protocol and the ISDA 2020 IBOR Fallbacks Protocol FAQs (in particular, paragraph 9 of the FAQs) for more information on how you can adhere to the IBOR Fallbacks Protocol and the adherence fees payable (if applicable to you). 

Industry bodies such as ISDA, the Alternative Reference Rates Committee, has recommended its respective members to consider adhering to the IBOR Fallbacks Protocol, so that their legacy derivative contracts with other adherents can be amended to incorporate fallback arrangements to mitigate against the risks associated with the discontinuation or non-representativeness of a Relevant IBOR, in a globally consistent and industry aligned basis.

Please consult with your legal, financial, tax, accounting or other professional advisers you deem appropriate on the implications of adhering to the IBOR Fallbacks Protocol.

For a list of adhering parties to the IBOR Fallbacks Protocol at any juncture, please click here.

Reference materials on the IBOR Fallbacks Protocol and IBOR Fallbacks Supplement

For more information on the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement, including the Fallbacks Amendments, the list of Protocol Covered Documents and the Protocol adherence process, please refer to the following materials/resources:

• the ISDA 2020 IBOR Fallbacks Protocol FAQs;
• the ISDA IBOR Fallbacks Fact Sheet;
• ISDA’s Benchmark Reform and Transition from LIBOR website; and
• ISDA’s short animation video “Introduction to Benchmark Fallbacks”.
   

The IBOR Fallbacks Supplement incorporates the Fallbacks Amendments to the relevant floating rate options in the 2006 ISDA Definitions. New derivative transactions which incorporate the 2006 ISDA Definitions and are entered into after the IBOR Fallbacks Supplement comes into force on 25 January 2021 will automatically include the terms of the

IBOR Fallbacks Supplement, without further action required.

Reference materials on the IBOR Fallbacks Protocol and IBOR Fallbacks Supplement
For more information on the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement, including the Fallbacks Amendments, the list of Protocol Covered Documents and the Protocol adherence process, please refer to the following materials/resources:

• the ISDA 2020 IBOR Fallbacks Protocol FAQs;
• the ISDA IBOR Fallbacks Fact Sheet;
• ISDA’s Benchmark Reform and Transition from LIBOR website; and
• ISDA’s short animation video “Introduction to Benchmark Fallbacks”.