Working with you to transition away from interest rate benchmarks by the end of 2021
Interest rates can be fixed or alternatively calculated by reference to benchmark rates. The London Interbank Offered Rate (LIBOR) is one of the most commonly used benchmarks for interest rates and is referenced in financial products such as derivatives, bonds, loans, structured products, mortgages and student loans. It often forms the basis on which interest payments under those products are calculated.
LIBOR is published on each London business day and is administered by ICE Benchmark Administration (IBA). It is based on quotations received from LIBOR panel banks, which are a group of banks who provide information to IBA as to the amount it would cost them to borrow from other banks so that an average can be calculated and published.
LIBOR is published in five currencies (euro, Japanese yen, pound sterling, Swiss franc and US dollar) and for seven interest periods (ranging from overnight to 12 months. Certain currencies also use specific benchmarks such as EURIBOR and EONIA for EUR, the Tokyo Interbank Offered Rate (TIBOR) for JPY, the Hong Kong Interbank Offered Rate (HIBOR) for Hong Kong Dollar and the Singapore Interbank Offered Rate (SIBOR) for Singapore Dollar.
The issues which affect the perceived robustness of LIBOR (such as the lack of interbank lending transactions on which to base the rate) also affect other interbank offered rates (IBORs) such as the Euro Interbank Offered Rate (EURIBOR).
In addition to IBORs, other interest rate benchmarks are being looked at. For example, the Euro Overnight Index Average (EONIA) started using a new calculation methodology on 2 October 2019 and it will be replaced by €STR from 3 January 2022.
In the United States, the preferred near risk-free rate (which is called the Secured Overnight Financing Rate or SOFR) is a new rate. Currently, the most frequently used overnight interest rate benchmark in the United States is the Effective Federal Funds Rate (EFFR). In connection with the transition away from US dollar LIBOR, a working group in the United States that consists of both private and public sector entities (the Alternative Reference Rates Committee or ARRC) is currently planning a transition to SOFR. This transition will result in SOFR being used instead of EFFR in a number of cases.
Other rates are also being looked at in, amongst other places, Hong Kong, Singapore, Switzerland, Japan, Australia and Canada.
HSBC is participating in a number of public and private sector working groups such as the Sterling Risk-Free Rate Working Group, the Alternative Reference Rates Committee in the United States and the Working Group on Euro Risk-Free Rates, each of which is responsible for identifying the preferred risk-free rate for the relevant currency and planning transition to that risk-free rate.
HSBC is aware that the discontinuation of LIBOR or other IBORs may impact both its new and existing products and services and that the impact on all parties, including clients, will need to be carefully considered.
HSBC is conducting due diligence to review and confirm how LIBOR and other IBORs are used in HSBC products or services. HSBC is monitoring this situation and, where appropriate, will provide clients with further information.
While HSBC's internal planning and due diligence on these changes has already started, as noted above, it is not yet possible to accurately determine the precise impact on all parties, including clients, until a replacement for the existing benchmark rates (including the preferred near risk-free rate and any necessary adjustments) have been confirmed at industry level and until more information is known on the timing of the changes.
HSBC will continue to inform clients on the changes, notably when there is more certainty on which new benchmarks are being adopted, their methodology, their term structure and the transition process agreed at industry level.
We expect most clients will assess how the affected interest rate benchmarks are used in their financial products and services. This will include an understanding of existing contracts and arrangements as well as the changes and risks that may arise from discontinuation or modification.
Clients should also consider if they require guidance from their professional advisors on the possible implications of the changes including from a financial, legal, accountancy or tax perspective.