Interbank Offered Rate (IBOR) Transition

What are Benchmark Rates?

Benchmark Rates are used in financial transactions throughout our economy and are an integral part of interest rate markets. All banks, including AIB, use them in the pricing of many products.

What are IBORs and why are they being reformed?

Benchmark Rates, such as IBORs have long been relied on by banks to set interest rates for lending. As they are key to the financial system, they have been subject to increasing regulation and review.

What are the alternatives?

New alternative reference rates are being proposed to replace IBORs. They include risk free rates which are based on transactions which have already taken place, making them more transparent and robust.

Who will be impacted by these changes?

All banks offering products based on IBORs will be affected. If you have a contract with us which relates to an IBOR this might need to be amended at some point in the future. If this is the case, we will communicate with you.

 

At the end of April 2020, the Working Group on Sterling Risk-Free Rates, the Bank of England and the Financial Conduct Authority published guidance which included updated objectives to reflect the impact of Covid-19 on the banking sector:

  • By the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked products to their customers
  • After the end of Q3 2020, lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternatives
  • No new GBP LIBOR based cash products, such as loans, maturing after 31 December 2021, are to be entered into after 31 March 2021
  • This builds on previous guidance which stated that new Alternative Reference Rates for IBORs should be in place by 31 December 2021, when banks will no longer be compelled to submit quotes for LIBOR

 

How will this guidance affect customers?

  • We are working towards meeting the objectives set by Regulators which means that we don't expect to offer LIBOR based cash products from early 2021
  • New products are being developed, but these may not be on a precise "like for like" basis with those currently in place
  • Existing contracts which relate to an IBOR may need to be reviewed or amended depending on final maturity date
  • We will communicate with customers where changes to products or documents are required

What are we doing to get ready for the change?

At AIB, we are devising a strategic transition plan, including the development of new products and reviewing our systems. We will continue to monitor and respond to how the market evolves and regulatory guidance, to work towards a smooth and effective transition.

What will happen next?

We are monitoring the situation, actively participating in market forums, and will update this website as IBOR transition develops.  If changes to products or documents are needed, we will communicate with you.

 

We recommend reading our IBOR Transition Guide for more information on the changes and next steps. 

 

You can also consider whether you require guidance from your professional advisors on the possible implications of any changes, including from a financial, legal, accountancy or tax perspective.




To download our full
IBOR Transition Guide
Click here

What alternative reference rates will replace IBORs?

 





Enhanced focus by Regulators on the move away from LIBOR

 

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Frequently Asked Questions

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    What is a Benchmark Rate?

    Benchmark Rates are used in financial transactions throughout our economy, for example, to calculate interest rates for loans.

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    What is IBOR?

    Interbank Offered Rates represent an estimate of how much it would cost a bank to borrow money from other banks. IBORs are published in several currencies and for a variety of interest periods.

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    What is LIBOR?

    The London Interbank Offered Rate. This is calculated from estimates submitted by a selection of banks in London.

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    What are Alternative Reference Rates (ARRs)?

    They are Benchmark Rates which are being developed as an alternative to IBORs.

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    Why are IBORs being replaced?

    IBORs are based on forward looking estimates of how much it costs for a bank to borrow money from other banks in the interbank lending market. The activity in this market has been declining gradually. ARRs, such as Risk Free Rates, are being introduced because they are based on transactions which have already taken place in markets which are very active, making them more accurate and robust.

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    What are Risk Free Rates?

    Risk Free Rates are a type of ARR. They are overnight rates, based on transactions which have already taken place.

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    How are Risk Free Rates different to IBORs?

    Risk Free Rates are based on information from transactions which have already taken place. They will therefore be less reliant on the judgement of banks, and therefore called "Risk Free".

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    When do the changes to IBORs come into effect?

    ARRs for LIBOR need to be in place by 31 December 2021. A timeline for having ARRs for EURIBOR is unclear at this time.

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    What is SONIA?

    The Sterling Overnight Index Average which is the new Risk Free Rate for Sterling transactions.

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    What is SOFR?

    The Secured Overnight Financing Rate which is the new Risk Free Rate for Dollar transactions.

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    What is €STR?

    The Euro Short Term Rate which is the new Risk Free Rate for Euro transactions.

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    What is EURIBOR and how is it changing?

    The Euro Interbank Offered Rate. EURIBOR has been reformed to meet the requirements of the EU Benchmarks Regulation, to include in its calculation, information based on transactions that have already taken place. €STR may replace EURIBOR in the future, however it is likely that in the short term, banks will continue to use EURIBOR.

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    Are all Banks impacted?

    All banks which offer products based on IBOR rates are impacted.

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    What are we doing to get ready for this change?

    We are monitoring this situation and will provide you with further information as things progress and guidance on a regular basis.

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    What does this mean for me?

    If you have a contract with us that relates to an IBOR, this might need to be amended at some stage in the future. If this is the case, we will communicate with you.

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    What if I am unsure about these changes?

    Should you wish to discuss the impact of IBOR transition on any of the products you hold with us, please contact us as outlined below.

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    What are the next steps?

    Whether you are taking out a new product, or you are an existing customer, we are making you aware that IBOR transition may require us to make changes to products or documentation. In either case, if you are affected by these changes we will communicate with you.

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    How is IBOR transition being guided by Regulators?

    In 2017, the Financial Conduct Authority (FCA) announced that they would no longer compel panel banks to submit quotes for LIBOR beyond the end of 2021. Since this announcement the FCA have provided guidance to banks to assist them with the transition from IBORs to ARRs. The FCA has been assisted in this task by the Bank of England (BoE) and the working group on Sterling Risk Free Rates (RFRWG), which is a subset of the BoE.

     

    The purpose of the transition to ARRs is to more accurately reect the current interbank market activities. As a consequence, several industry bodies and private and public sector working groups have been established in various countries to choose suitable ARRs and to provide guidance to banks to help them with the transition.

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    Does this change only affect GBP LIBOR products?

    No. While GBP LIBOR, which seeks to measure lending in sterling on the London interbank market, is a widely recognised Benchmark Rate, IBORs are available to measure interbank lending in lots of other currencies, for example USD.

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    What are Regulators advising banks in order to assist IBOR transition?

    In November 2019, the Risk Free Rates Working Group (RFRWG) set an objective for banks and other financial providers that no new GBP LIBOR based cash products, such as loans, maturing after 31 December 2021, are to be entered into after 30 September 2020. In April 2020, in light of the impact of Covid 19, this has been extended to 31 March 2021.

     

    This means that from this date, it is unlikely that banks will be able to offer customers LIBOR as an interest rate on their loans. The FCA and the BoE both fully support this recommendation from the RFRWG.

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    What is AIB doing based on the new Bank of England guidance?

    We will work towards meeting the objectives set by Regulators. We are also working on a strategy so we can offer a new product based on ARRs.

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    What options are being proposed for new products and when will they be in place?

    We are currently working on both a new product strategy, and a plan to transition existing customers with contracts linked to LIBOR to ARRs, such as an RFR. We will provide an update once a path has been clearly established.

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    How will my IBOR contract be changed to one which incorporates an RFR?

    This will depend on the kind of product you hold with us and the terms of your contract. You should review your documents carefully and seek independent professional advice (legal, tax, accounting etc.) as needed. The amendment process may be different for each product type. If you are affected we will contact you.

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    Where can I go for more information?

    IBOR.QUERY@aib.ie or your Relationship Manager.

    In addition the following websites may be useful:

     

    UK

    https://www.bankofengland.co.uk/

     

    Europe

    https://www.ecb.europa.eu/home/html/index.en.html

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Frequently Asked Questions
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Web disclaimer

 

This guide is provided for information only and may not represent the views or opinions of AIB Group (UK) p.l.c. or its affiliates including Allied Irish Banks, p.l.c. (collectively, the AIB Group), employees or officers. The information contained in this guide does not constitute and shall not be construed to constitute legal, tax and/or accounting advice by AIB Group (UK) p.l.c. AIB Group (UK) p.l.c. makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change. This guide may only be accessed by recipients lawfully entitled to do so.

 

This guide and any documents provided with it should not be used or relied upon by any person/entity (i) for the purpose of making investment or regulatory decisions, (ii) to provide regulatory advice to another person/entity based on matter(s) discussed herein or (iii) in connection with any transaction, contract or communication.

 

Recipients of this guide should obtain guidance and/or advice, based on their own particular circumstances, from their own professional advisors (legal, tax, accounting or otherwise) in light of IBOR transition as they consider necessary. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This guide is not a commitment or firm offer and does not oblige us to enter into such a commitment, nor are we acting as a fiduciary to you.

 

Any transaction which you may enter into with AIB Group (UK) p.l.c. will be on the basis that you have made your own independent evaluations, without reliance on AIB Group (UK) p.l.c., and based on your own knowledge and experience and any professional advice which you may have sought in relation to all aspects of the transaction including, without limitation, legal, accounting and/or taxation advice. In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising whether in contract, tort (including negligence), breach of statutory duty, or otherwise, arising out of, or in connection with, your use of (or failure to use) any information provided in this document.

 

We encourage you to keep up to date with the latest industry developments in relation to IBOR transition and to consider its impact on your or your business. You should consider, and continue to keep under review, the potential impact of IBOR transition on any existing product you have with AIB Group (UK) p.l.c., or any new product you enter into with us.