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LIBOR is ending

Preparing for the end of IBOR

Following decisions by global regulators and industry bodies, Kleinwort Hambros and the global banking industry are preparing for the end of certain Interest Rate benchmarks, such as Sterling LIBOR, at the end of 2021. 

CurrencyDate ending 
LIBOR (All Currencies, bar USD LIBOR)31ST December 2021
USD LIBOR30th June 2023

 

A major part of preparing for the end of LIBOR is ensuring awareness of the planned changes and how they will impact the solutions provided by Kleinwort Hambros. This webpage provides background to the planned changes. Clients of Kleinwort Hambros will receive specific communications on the impact of the transition through our usual channels.

IBOR Vs LIBOR?

Other publications may refer to the end of “IBOR”. IBOR is an acronym for Interbank Offered Rate. This is a term which collectively refers to interest rate benchmarks across a wide range of currencies. “LIBOR”, one of these benchmarks is the GBP or London Interbank Offered Rate.

LIBOR have been in place for many years and are widely used as the benchmark to calculate interest rates, coupon payments and valuations for numerous financial products. Such products include mortgages, loans, bonds structured products and derivatives. 

Why is LIBOR ending?

The decision to end the use of LIBOR was taken by a collection of global regulators and central Banks, notably in the UK, US and Europe. The rationale for doing so was primarily because LIBOR submissions are based on judgement by the panel contributors, rather than a specific formula or observed transactions. In addition, the number of submitting banks has decreased over recent years, whereas the volume of transactions linked to these LIBOR has increased. Regulators are therefore looking to replace LIBOR with a more representative and robust benchmark.

What will replace the IBOR benchmarks?

The alternative benchmarks vary by currency and product. 

In the financial markets and products, such as bonds and derivatives, the IBOR benchmarks will be replaced by what are collectively referred to as Risk Free Rates (“RFR”). These rates will be fixed daily, and are calculated by the respective administrators using observed overnight loans between banks from the prior day. The replacement RFR benchmarks are:

CurrencyRFR
SterlingSONIASterling Overnight Index Average
US DollarSOFRSecured Overnight Financing Rate
EuroESTREuro Short Term Rate

 

For investment portfolios, these RFRs are now used as part of the market composite benchmark for portfolio comparison purposes.

For mortgage and loan products, the Kleinwort Hambros Base Rate will be the predominant benchmark for variable rate lending. 

The Kleinwort Hambros Base Rate (“KHBR”) is a Bank-defined rate that reflects our variable lending costs in the given currency. These base rates are revised periodically. In practice, for developed currencies without negative monetary policy (such as GBP and USD), the KHBR has never been higher than the respective Central Bank base rate. Nonetheless, we retain the right to adjust the rate, such as if the Central Bank base rate fails to reflect our variable costs. The KHBR is published on our website, which you can access by clicking here.

The products predominantly impacted by the transition are:

  • Floating Rate Notes (FRN) – Bonds with variable interest rates
  • Structured Products
  • Collective Investments/Funds
  • Mortgages
  • Loans
  • Investment Strategies

For mortgage products, the transition is ongoing. We will advise you either on your renewal or notify you about the changes through the second half of 2021, in-line with your circumstances.
For financial securities, the transition will be defined by the issuers. We are monitoring developments in respect of instruments in advisory and discretionary portfolios. Clients with Execution Only portfolios should familiarise themselves with how their holdings will be impacted by any changes.

The impact will vary depending on the IBOR based product you hold. However, potential actions could include:

  • Mortgages/loans: variation of existing facilities or execution of new agreements.
  • Bonds and Structured Products: transition of bond holdings from IBOR to an alternative rate, via communication from the issuer.
  • Investment Strategies: the market composite benchmark used for portfolio performance comparison has moved from IBOR to an RFR Benchmark already. 

No. At this stage we are only making you aware of the transition. If specific action is required by you, we will contact you directly, for instance, through the corporate actions process. 

Kleinwort Hambros will provide regular communication including what, if any actions, are required. You will receive product specific updates when relevant for you.

As of the 31st March, lenders and borrowers have ceased issuing new LIBOR linked products that expire after the end of 2021. Issuers are accelerating the reduction of the existing stock of LIBOR referencing products with the aim of completing active conversion, where viable, by end Q3 2021.

Where active conversion is not possible, the market is working to ensure that robust fullback arrangements are in place.

For further detail and guidance on the market-wide timelines, processes and conversion methodologies, please click here.

If you have any questions, please contact your Private Banker.

CA93/APR/2021