The Reserve Bank on Thursday asked banks and financial institutions to use any widely accepted alternative reference rate (AAR) instead of LIBOR (London Interbank Offer Rates) as the reference rate for entering into new financial contracts. .
The Reserve Bank’s directive follows a decision by the Financial Conduct Authority (FCA), UK, which announced on March 5, 2021 that all LIBOR settings will either cease to be provided by any administrator or will no longer be representative.
To deal with the emerging situation, the RBI has asked banks and financial institutions to “stop entering into new financial contracts that refer to LIBOR as a benchmark and instead use any widely accepted alternative reference rate”. (ARR), as soon as possible. In any case by December 31, 2021.”
Financial institutions, it suggested, should include strong fallback clauses in all financial contracts that refer to LIBOR and whose maturity occurs after the stated expiration date of LIBOR settings. RBI has also advised financial institutions to stop using Mumbai Interbank Forward Outwrite Rate (MIFOR), a benchmark that refers to LIBOR, latest by December 31, 2021.
The Reserve Bank of India (RBI) in August 2020 asked banks to prepare a board-approved plan, which outlined an assessment of the risks associated with LIBOR and measures to address the risks arising from the termination of LIBOR. Steps were to be taken, including preparation for adoption. of ARR. While some US dollar LIBOR settings will continue to be published until June 30, 2023, the extension of the expiration deadline is primarily for the purpose of ensuring the roll-off of USD LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR. for.
“Therefore, it is expected that contracts referring to LIBOR may be entered into ordinarily after December 31, 2021, solely for the purpose of managing the risks arising from LIBOR contracts (eg hedging contracts, innovation, support of client activity market making in, etc.), was contracted on or before December 31, 2021,” RBI said.
It has asked banks and financial institutions to incorporate strong fallback clauses in all financial contracts referencing LIBOR, preferably before the respective expiration dates and whose maturity is after the declared expiration date of the respective LIBOR settings.
The central bank also said that it will continue to monitor the evolving global and domestic situation regarding the transition away from LIBOR and will actively take steps to mitigate the associated risks to ensure a smooth transition.
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