IBOR Transition Guide for Asia
July 2020

Contributors:

Disclaimer
The information and opinion commentary in this ASIFMA, APLMA, ICMA and ISDA (collectively, theAssociations) – IBOR Transition Guide for Asia (Paper) was prepared by the Asia Securities Industry
and Financial Markets Association (ASIFMA), Asia Pacific Loan Market Association (APLMA),
International Swaps and Derivatives Association (ISDA), and the International Capital Market
Association (ICMA) to reflect the views of our members. The Associations believe that the informationin the Paper, which has been obtained from multiple sources believed to be reliable, is reliable as ofthe date of publication. As estimates by individual sources may differ from one another, estimates for
similar types of data could vary within the Paper. In no event, however, do the Associations make any
representation as to the accuracy or completeness of such information. The Associations have no
obligation to update, modify or amend the information in this Paper or to otherwise notify readers if
any information in the Paper becomes outdated or inaccurate. The Associations will make every effort
to include updated information as it becomes available and in subsequent papers.

Page 2

About the Associations
Asia Securities Industry & Finance Markets Association (ASIFMA)ASIFMA is an independent, regional trade association with over 130 member firms comprising adiverse range of leading financial institutions from both the buy and sell side including banks, asset
managers, law firms and market infrastructure service providers. Together, we harness the sharedinterests of the financial industry to promote the development of liquid, deep and broad capital
markets in Asia. ASIFMA advocates stable, innovative and competitive Asian capital markets that arenecessary to support the region’s economic growth. We drive consensus, advocate solutions andeffect change around key issues through the collective strength and clarity of one industry voice. Our
many initiatives include consultations with regulators and exchanges, development of uniform
industry standards, advocacy for enhanced markets through policy papers, and lowering the cost of
doing business in the region. Through the GFMA alliance with SIFMA in the US and AFME in Europe,
ASIFMA also provides insights on global best practices and standards to benefit the region.
The Asia Pacific Loan Market Association (APLMA)
The Asia Pacific Loan Market Association (APLMA) is a professional (not-for-profit) trade association
which represents the interests of institutions active in the syndicated loan markets around Asia-Pacificregion. Its primary objective is to promote growth and liquidity in the syndicated loan markets (bothprimary and secondary), which it endeavours to do by: advocating best market standards andpractices; maintaining a suite of highly professional standard documents; engaging with regulators on
key matters affecting the markets; organising conferences and knowledge-sharing events in member
countries; and providing networking platform for members across the region.
International Capital Market Association (ICMA)ICMA is the trade association for the international capital market with around 600 member firms from
more than 60 countries, including banks, issuers, asset managers, infrastructure providers and law
firms. It performs a crucial central role in the market by providing industry-driven standards andrecommendations for issuance, trading and settlement in international fixed income and related
instruments. ICMA liaises closely with regulatory and governmental authorities, both at the nationaland supranational level, to help to ensure that financial regulation promotes the efficiency and costeffectiveness of the capital market.
www.icmagroup.org@ICMAgroup
International Swaps and Derivatives Association (ISDA)
Since 1985, ISDA has worked to make the global derivatives markets safer and more efficient. Today,
ISDA has more than 900 member institutions from 75 countries. These members comprise a broad
range of derivatives market participants, including corporations, investment managers, governmentand supranational entities, insurance companies, energy and commodities firms, and internationaland regional banks. In addition to market participants, members also include key components of thederivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories,
as well as law firms, accounting firms and other service providers. Information about ISDA and its
activities is available on the Association’s website: www.isda.org. Follow us on Twitter, LinkedIn,
Facebook and YouTube.
Page 3

Associations

Rebecca Weinrauch
Executive Director – Head of Fixed Income
rweinrauch@asifma.org+852 2531-6500

Andrew Ferguson
Chief Executive Officer
Andrew.Ferguson@Aplma.com+852 2826-3500

Mushtaq Kapasi
Managing Director, Chief Representative, AsiaPacific
Mushtaq.Kapasi@icmagroup.org+852 2531-6590

Jing Gu
Head of Legal, Asia
JGu@isda.org+65 6653-4173

Authors

Page 4

Damian Lobb
Partnerdamianlobb@deloitte.com.hk+852 2258-6099

Helen Fok
Partnerhelen.fok@morganlewis.com+852 3551-8565

Justin Lau
Associate Director
juslau@deloitte.com.hk+852 2852-6317

Austin Ho
Associateaustin.ho@morganlewis.com+852 3551-8512

Introduction

This Paper provides an overview of the key implementation issues to be considered by Financial
Institutions (FIs) in Asia preparing for the transition from the London Interbank Offered Rate (LIBOR)
in all its tenors and currencies to Alternative Reference Rates (ARRs) by the end of 2021 (LIBOR
Transition). Specifically, it includes a practical implementation checklist which FIs may use as areference.
The objective of this Paper, including the practical implementation checklist, is to assist each FI to take
into account issues that are relevant in implementing its individual transition plan. In practice, eachFI’s LIBOR transition process will differ. FIs should not treat this Paper as comprehensive or as
uniformly applicable to each FI’s individual circumstances.

LIBOR
LIBOR is currently produced in seven tenors (overnight/spot next, one week, one month, two months,
three months, six months and 12 months) across five currencies (USD, Euro, CHF, JPY and GBP). It isbased on submissions provided by a panel of 20 banks. These submissions are intended to reflect theinterest rate at which banks could borrow money on unsecured terms in wholesale markets. LIBOR is
administered by ICE benchmark administration (IBA), which is regulated by the UK’s Financial Conduct
Authority (FCA).
LIBOR, along with other interest rate benchmarks based on bank borrowing costs around the world(collectively known as IBORs), has served as a fundamental building block in the global financial
markets since the 1980s. In some countries, the calculation of the local IBOR uses LIBOR as an input.
Consequently, the discontinuance of LIBOR directly impacts the future sustainability of these rates.
Other IBOR rates, such as Hong Kong's HIBOR, are calculated independently.
LIBOR is widely used in a variety of loans and financial instruments, including consumer and syndicatedloans, structured products, securitisations, short term instruments, bonds such as floating rate notes,
over-the-counter derivatives and exchange-traded derivatives, as well as in corporate contracts,
accounting, tax, and valuation methods.

The Limitations of LIBOR
The global financial crisis in 2008 exposed several crucial limitations and weaknesses inherent to
LIBOR. The key limitations can be summarized as follows:•

Susceptibility to manipulation – the LIBOR rate setting system was tainted by rate-rigging
scandals where panel bank submissions were alleged to have been inaccurate or manipulated
to project market strength and for other proprietary purposes. This led to loss of market trust,criminal prosecution and billions of dollars in fines and settlements paid by panel banks.
Following the 2012 Wheatley Review, a number of reforms were introduced aimed at reducing
subjective input and making LIBOR a more transaction-based benchmark. IBA became LIBOR’s
administrator, and the FCA the supervisory authority for IBA.

Page 5

•Illiquidity of the underlying market – notwithstanding the reforms introduced, the numberof transactions in the short-term wholesale funding markets have fallen significantly overtime, as financial institutions became more reluctant to lend on an unsecured basis for terms
longer than overnight. The low volume of transactions increases LIBOR’s vulnerability to shortterm market illiquidity and amplification of price moves. This represents a potentially serious
source of vulnerability and systemic risk. At the same time, banks are reluctant to assume thelegal risks associated with submitting quotes based on very shallow markets.

•

Challenge to LIBOR as a 'risk-free' rate –financial transactions are better suited to reference
rates that are closer to risk-free. Identifying and adopting such rates has been one of the key
objectives of the global agenda of interest rate benchmark reform.

The End of LIBOR
The reasons noted above ultimately led the FCA to announce in July 2017 that the continued
publication of LIBOR could not be guaranteed beyond the end of 2021. To ensure an orderly transition
away from LIBOR, the FCA obtained agreement from submitting panel banks to voluntarily continue
submissions for LIBOR until the end of 2021.
Working groups in the respective LIBOR jurisdictions have worked to propose and develop ARRs.
Additionally, countries with national benchmark rates using LIBOR as an input are evaluating theimpacts of the transition and potential alternatives.
The FCA and supervisory authorities across the globe have emphasized the fundamentally "marketled" nature of the initiative, and have continued to encourage financial market participants to maketimely preparations for the discontinuation of LIBOR. Furthermore, in a statement on April 29, 2020,
the FCA acknowledged the impact of COVID-19, recognizing that the disruption to the markets will
inevitably cause focus to move away from LIBOR transition, but reiterated that the final deadline of
the transition remains unchanged.

Replacing LIBOR
In order to achieve the FCA's target of replacing LIBOR, ARRs have been identified for each of the five
LIBOR currencies.
Alternative Reference Rates
ARRs are interest rates to be used for replacing LIBOR as the primary benchmark measure and benefit
from regulatory endorsement. The need for expert judgement is minimised by basing the ARRs on
robust underlying transactional data.

Page 6

LIBOR Replacement ARRs
Currency

Selected Rate

Working Group

Administrator

Type

Pound
Sterling,
GBP

Sterling Overnight
Working Group on Sterling
Index Average
Risk-Free Reference Rates(SONIA)Bank of England(BoE)

Unsecured

US Dollar,
USD

Secured Overnight
Alternative Reference Rates Federal Reserve
Financing Rate
Bank of New York
Committee (ARRC)(SOFR)

SecuredEuro,
EUREuro Short-Term
Rate(€STR)

Working Group on Risk-Free European Central
Bank (ECB)
Rates

Unsecured

Swiss Franc,
CHF

Swiss Average
Rate Overnight(SARON)

National Working Group on
CHF Reference Rates

SIX Swiss Exchange

SecuredJapanese
Yen, JPY

Tokyo Overnight
Average Rate
(TONAR)

Cross-Industry Committee
on Japanese Yen Interest
Rate Benchmarks

Bank of Japan (BoJ)

UnsecuredStrengths of ARRs•

Increased robustness – all of the selected ARRs are overnight rates, based on actual
transactions in a liquid underlying market. This is considered to be more robust and less prone
to manipulation, given the volume of observable data, and eliminates the need to determine
rates using expert judgement. Financial instruments that reference these rates rarelyreference the overnight rate itself, but instead typically reference a backward looking
compounded average of the overnight rates published during the relevant period.

•

Elimination of credit risk – ARRs eliminate the element of credit risk inherent in LIBOR andallow market participants to take or hedge risk related to monetary policy rates without
unintentionally introducing a variable credit component.

Key considerations associated with transition to ARRs
New products•

Term structure – LIBOR is forward-looking in nature, and published in seven tenors, whereas
ARRs are currently only available as overnight rates. While ARRs compounded in arrears are
expected to be the primary vehicle for replacing LIBOR, it is possible that in some jurisdictions
forward-looking term rates derived from transactions referencing the ARRs (‘forward looking
term rates’) may be developed. It is anticipated that the use of forward looking term rates will
be limited and regulators have urged market participants not to delay transition in the hopethat forward looking term rates will be available to them.

Page 7

•

Risk premium – LIBOR includes an element reflective of the funding costs of banks, which is
not present in ARRs, thus for existing products to fall back to replacement rates, a spreadadjustment must also be considered. If these existing transactions are voluntarily amended,counterparties could use a spread adjustment or a one-time negotiated amount. International
Swaps and Derivatives Association (ISDA) has produced a methodology (the ISDA
Methodology) for a spread adjustment in derivatives fallbacks (although, importantly, thisspread adjustment is only meant for fallbacks in derivatives and must be consideredseparately by the relevant parties for use in other products and for use in any voluntarytransition efforts). 1 The Alternative Reference Rates Committee (ARRC) in the US and theWorking Group on Sterling Risk-Free Reference Rates in the UK have also carried out marketwide consultations on the appropriate spread adjustment for bond fallbacks, the results ofwhich align with the new ISDA Methodology.

Fallback language in new IBOR contracts•

Fallback language – While FIs should be making every effort to reduce the number of newcontracts issued that extend beyond the end of 2021 and reference LIBOR, to the extent there
are such new contracts referencing LIBOR, FIs will need to include amended fallback terms oralternative provisions that take into consideration the permanent cessation of the referenced
rate. Fallbacks may differ across different financial product types and asset classes. Therefore,
there may be a potential mismatch in product replacement rates across portfolios.
Appropriate fallback language is being developed by working groups and industry bodies suchas ISDA, and Asia Pacific Loan Market Association (APLMA) and is already market standard in
the international bond market.

Legacy products•

FIs will need to consider carefully how to transition legacy LIBOR products to ARRs. Some
practical considerations are set out in the practical implementation checklist below.

Other considerations•

Market factors – Sufficient market volume and liquidity in ARR-based instruments are
required for a successful transition. ARRs are used increasingly across all markets: the issuanceof new, public, sterling LIBOR floating rate notes with a maturity beyond the end of 2021 has
all but ceased, and the FCA and BoE have encouraged firms to make SONIA the primaryinterest rate benchmark in sterling markets. However, the pace and schedule of the transition,
as well as rate of market adoption is different for different jurisdictions and also varies byasset class.

•Accounting / tax / IT infrastructure considerations – There may also be accounting, tax andinfrastructure considerations associated with transitioning to ARRs, which FIs will need toconsider.

More information about the consultations that resulted in this spread adjustment and its methodology areavailable in Sections 2 and 3 of the Benchmark Hub on ISDA’s website, available athttps://www.isda.org/2020/05/11/benchmark-reform-and-transition-from-libor/.

1

Page 8

Consequences for other IBORs
A number of key Asian benchmarks are synthetic benchmarks derived by applying a forward FX curveto the USD LIBOR curve. When USD LIBOR is no longer available after the end of 2021, thesustainability of these benchmarks is in doubt.
Key benchmarks are: SOR (Singapore); THBFIX (Thailand); MIFOR (India) and PHIREF (Philippines).
Planning for the cessation of LIBOR is underway by the respective administrators of these benchmarks.
Some have replacement rates for new transactions identified and transition timelines in place (SOR
and THBFIX), whereas others are yet to identify the replacement rates. As a result, any organization
planning for the cessation of LIBOR should also consider its exposure to any of these four affected
IBORs.

Page 9

Practical Implementation Checklist

Drawing upon a combination of practical experience from organizations that have initiated transition
programs, as well as emerging guidance from the regulatory community, FIs can make reference tothe following key considerations when performing their own assessment of the impact frombenchmark rate reforms:
Steps
1.Program
Governance2.Transition
Management Program

3.Communication
Strategy

Page 10

Key Considerations•

Appoint senior executives todirect the overall IBOR
Transition Program.

•

Establishagovernanceframework over impacted
business lines and functions.

•

Identify key stakeholders,project
leadersandsupporting staff to oversee
and execute the transition.

•

Create an IBOR working group tomonitor market and regulatory
developments, assist senior executives
to implement the IBOR transition
program and provide regular internal
communications to all relevant
stakeholders.

•

Conduct a comprehensive impact assessment across key focus
areas such as financial products, contracts, business process(including IT systems and valuation models).

•

Identify resources and budget needs to implement the transition
program, including the assistance of external consultants, if
required.

•

Establish a project management framework to monitor, amongst
others, resources, budgets, progress of the IBOR transition
program, and risks.

•

Consider time and resources needed to make operational changes
and communicate with relevant internal stakeholders.

•Establish clear communication strategy to be used both internallyand externally with counterparties, product issuers, regulators andindustry bodies.

•

Develop communication materials such as learning materials, andnewsletters for internal stakeholders, and provide training
programs to all relevant staff.

IBOR Transition Program
Governance Structure(For illustration purposes only)4. Identify andValidate Exposures

5.Develop ProductStrategy

6.Risk Management

7. Transition of
Existing Contracts and
New Contracts•

Develop client communications and disclosures with input fromlegal, compliance and if needed, external advisors.

•

Provide clear messaging on transition to impacts to clients andinvestors.

•

Conduct a product exposure analysis to determine all IBOR-linked
products for each line of business.

•

Continuous monitoring of the approach for tracking these IBORlinked products throughout the transition period.

•

Quantify exposures for IBOR-linked products maturing beyond yearend 2021.

•

Establish a clear strategy and timeline for reducing reliance on IBOR
for new product issuance.

•

Define timelines for offering new ARR-linked products.

•

Define risks and new product approval requirements based on new
ARRs.

•

Identify key risks resulting from IBOR discontinuation including
market readiness, business impacts, financial and legal risks. Key
financial risks include accounting treatment and valuation.

•

Establish processes to measure and monitor these material risks.

•

Identify mitigating actions to all identified risks especially aroundproduct, operational and conduct risk.

•

Provide periodic update to senior management.

•

Update risk management framework accordingly.

•

Identify all IBOR related contracts that extend beyond the end of
2021. FIs should begin referencing ARRs when entering into newcontracts, as far as practicable.

•

For existing contracts with no fallback language or with fallback
language that does not contemplate the expected permanent
discontinuation of LIBOR, either begin toa) amend these contracts to incorporate appropriate fallback
language or transition them directly to an ARR; orb) determine if these contracts can be renegotiated, terminatedor closed out prior to the end of 2021.

•

For new contracts that reference affected IBORs, make every effort
to incorporate alternative fallback language catering for thepermanent cessation of the IBOR.

•

Assuming a material number of contracts do not have suitablereplacement fallback language, determine size and program
needed to implement fallback language as written, and begin

Page 11

planning for implementation. This should include customer
notification processes.

8.Operational andTechnology Readiness9.Accounting andreporting

10.Taxation

Page 12•Consider the conduct risks referred to in the section "Conduct Risk"
below when amending existing client contracts.

•

Assess where IBOR is used front-to-back across all affected businessand operations.

•

Develop a process to incorporate new market data sources and new
calculation methodologies into IT system.

•

Build testing plans for new product capabilities, models/validation.
Ensure readiness plan will have oversight of the readiness state ofmaterial operation and technology vendors.

•

Begin to plan for internal testing, third party validation /readinessfor transition.

•

Identify instruments that might be affected by accounting issues.

•

Identify impact on fair value accounting and impairment to profit &loss, credit allowances, and fair value hierarchy.

•

Identify impact and changes need to be made to current financesystems, operations, and control environment.

•

Update financial disclosures accordingly.

•

Identify and understand tax implication based on current guidance
update tax documentation if needed.

•

Determine tax reporting requirements and consider jurisdiction
affected.

•

Review the nature of amendments to existing contracts and review
intra-group arrangements (if any).

Key Questions to Consider in LIBOR Transition
Exposure to LIBOR•

What is the FI's exposure to contracts that are linked to LIBOR?

•

Can the identification and quantification of this exposure be rerun regularly and easily?

•

What level of detail can be gathered?

Differences between LIBOR and ARRs•

Is the FI following progress of official sector and official ARR working group considerations on
how to address the economic impact of maturity differences between LIBOR (as a forwardlooking term rate) and ARRs (as overnight rates that are typically traded based on a backward
looking compounded in arrears calculation)?

•Is the FI following progress of trade association and official ARR working group considerations
on how to address the economic impact of differences in risk components between LIBOR(which captures a certain level of credit risks) and ARRs (which are largely considered “riskfree”)?

Legal & Contractual Implications•

How many contracts that are linked to LIBOR will mature beyond the end of 2021?

•

How many different product types are there (e.g. loans, bonds and derivatives)?

•

Are there any interdependent products (e.g. loans with linked derivative transactions)?

•

Where are they retained and in what form?

•

Who are the counterparties to those contracts?

•

What law are those contracts governed by?

•

How can those contracts be amended?

Operations & Technology•

How many systems use LIBOR?

•

Do these systems need to be changed, or can they be overlaid to accommodate ARR
mechanics?

•

How long will it take to build and test and/or overlay these systems?

•

How do these systems link into each other?

Internal Training and Client Communications•

Which internal teams should be trained on LIBOR transition?

•

How will the internal teams be kept up-to-date on developments in relation to LIBOR
transition?

•

Who do you need to contact regarding LIBOR transition queries?

•

Which internal teams will be responsible for internal training and client communication?

•

What information will be provided to customers, when and who has to agree the key
messaging?

Page 13

•How do you train all key staff to handle internal and external queries to ensure consistency inresponse?

Conduct Risk•

How do you make sure you treat all customers equitably, honestly and fairly during the LIBOR
transition?

•

How do you ensure consistency in the treatment of different clients and different types ofclients?

•

How will these risks be monitored, and how will these risks be mitigated?

Consequences of Inaction
The following are a selection of the potential consequences that may arise if participants do notprepare for the transition away from LIBOR.

Page 14•

Operational implications of being unable to book new rates when approached by clients totransition existing contracts•

Conduct and legal risk of continuing to sell LIBOR linked products to clients•

Uncertainty over payment obligations and even legal status of LIBOR-linked contracts•

Issues with hedge effectiveness should the organization not be ready to transition its hedging
relationships•

Financial models and forecasts still based on a rate that no longer exists•

Floating rate notes potentially converting to fixed as traditional fallbacks do not envisage thepermanent unavailability of a LIBOR rate•

Potential regulatory action designed to accelerate transition (capital charges linked to LIBOR
exposure etc.)•

Competitive disadvantage as the institution is unable to offer new products to customers

Key Resources for Reference•

Financial Conduct Authority: Conduct risk during LIBOR Transition – Questions and answers
for firms about conduct risk during LIBOR transition•

Alternative Reference Rates Committee: Practical Implementation Checklist for SOFR
Adoption•

Alternative Reference Rates Committee: Buy-Side/Asset Owner Checklist•

Alternative Reference Rates Committee: Recommended Best Practices for Completing theTransition from LIBOR•

The Working Group on Euro Risk-Free Rates: Checklist on the transition from EONIA to the€STR•

The National Working Group on Swiss Franc Reference Rates: Checklist: Operational
Readiness

Other relevant websites include:•

https://www.newyorkfed.org/arrc/index.html•

https://www.ecb.europa.eu/paym/initiatives/interest_rate_benchmarks/WG_euro_riskfree_rates/html/index.en.html•

https://www.snb.ch/en/ifor/finmkt/fnmkt_benchm/id/finmkt_reformrates•

https://www.boj.or.jp/en/paym/market/jpy_cmte/index.htm/•

https://www.bankofengland.co.uk/markets/transition-to-sterling-risk-free-rates-from-libor•

https://www.fsb.org/work-of-the-fsb/policy-development/additional-policy-areas/financialbenchmarks/•

https://www.fca.org.uk/markets/libor•

https://www.bot.or.th/Thai/FinancialMarkets/Pages/ReferenceInterestAndEndOfUseLIBOR.
aspx•

https://www.abs.org.sg/benchmark-rates/about-sora•

https://www.tma.org.hk/en_market_LIBOR.aspx•

https://afma.com.au/ibor_transformation_working_group•https://www.isda.org/2020/05/11/benchmark-reform-and-transition-from-libor/•https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/benchmark-reform/

Page 15