As Libor nears end, BSP tells banks to start transition to other benchmarks

MANILA, Philippines—The central bank on Thursday (Sept. 16) urged local financial institutions to “proactively transition” transactions to alternative reference rates early ahead of the termination of the London Inter-Bank Offered Rate (Libor) as a benchmark rate.

Libor—an interest rate benchmark used in a wide range of financial transactions and was the subject of a market manipulation scandal almost a decade ago—will enter a phased process of cessation starting on Jan. 1, 2022.

“As the discontinuation of Libor as reference rate approaches, the BSP will continue to engage the industry and individual banks to facilitate a smooth transition,” BSP Governor Benjamin Diokno said at an online briefing.

The transition away from Libor, initially announced in 2017, reached a crucial stage with the March 2021 announcement by the United Kingdom’s Financial Conduct Authority of the formal timeline for the discontinuation of the benchmark.

Local banks currently use Libor as a reference rate for various foreign currency-denominated transactions, including corporate and consumer loans, and bank deposits. It is also referenced in certain fixed income securities available in the market, as well as interest rate swaps and cross currency swaps.

“The cessation of Libor will affect not only products that are directly referenced to Libor,” Diokno said. “For instance, the Philippine Interbank Reference Rate or Phiref is computed using US dollar Libor.”

Phiref in its current form will need to be discontinued once Libor ceases. Products benchmarked to Phiref included interest rate swaps, cross currency swaps and some peso corporate loans.

“The inability to establish replacement rates for outstanding Libor referencing contracts when Libor ceases will render financial institutions and their counterparties or clients incapable of repricing and valuing their financial exposures,” Diokno warned. “This would subject them to unknown risks.”

To this end, the BSP issued an order in November 2020 outlining the transition away from Libor and reporting requirements on Libor-related exposures for local banks.

The order highlighted the BSP’s expectation for supervised entities to implement viable transition plans to ensure that the expected end of Libor does not disrupt operations and the efficient provision of services to clients and other market counterparties.

Banks must ensure overall operational readiness for the adoption of alternative reference rates by putting necessary systems and infrastructure in place, and establishing appropriate contractual arrangements.

“The BSP does not intend to prescribe specific alternative reference rates to LIBOR for use by Philippine banks, as we view the choice to be market-driven,” Diokno said. “Based on continuing engagements with the market, Philippine banks intend to adopt the rates widely accepted in international markets as successors to Libor.”

TSB