LIBOR is ending
The London Interbank Offered Rate (“LIBOR”) has been in place for many years and was widely used as the benchmark to calculate interest rates, coupon payments and valuations for numerous financial products in many currencies. Such products include mortgages, loans, bonds, structured products and derivatives.
Following decisions by global regulators and industry bodies, Kleinwort Hambros and the global banking industry have taken steps to remove LIBOR from use in the Banking system.
The UK regulator confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative on the following timeline:
- immediately after 31 December 2021, in the case of all Sterling, Euro, Swiss Franc and Japanese Yen settings, and the 1-week and 2-month US dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US Dollar settings.
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 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 are the alternatives to the LIBOR benchmarks?
The alternative benchmarks vary by currency and product.
In market traded financial products, such as bonds and derivatives, the IBOR benchmarks have been replaced by what are collectively referred to as Risk Free Rates (“RFR”).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 key replacement RFR benchmarks are:
|Sterling||SONIA||Sterling Overnight Index Average|
|US Dollar||SOFR||Secured Overnight Financing Rate|
|Euro||ESTR||Euro Short Term Rate|
For investment portfolios, these RFRs are now used as part of the market composite benchmark for portfolio comparison and performance measurement purposes.
For mortgages and other loan products, we now use the Kleinwort Hambros Base Rate as the predominant benchmark for variable rate lending in the relevant currency.
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 (Bonds with variable interest rates)
- Structured Products
- Collective Investments/Funds
- Investment Strategies
For our lending products (such as mortgages), the transition is complete in all currencies.
For financial securities issued by third parties, instruments linked to Sterling LIBOR have been converted to RFRs, except for a few which will use a ‘synthetic LIBOR’ for a limited transitional period, as permitted by regulators. The plan to transition US Dollar LIBOR-linked instruments by June 2023 will be defined by the issuers. We are therefore monitoring developments in respect of US Dollar instruments held within advisory and discretionary portfolios. Clients with Execution Only portfolios should familiarise themselves with how their holdings will be impacted.
The remaining transition will apply to investments in Bonds and Structured Products where the interest rate or coupon is determined by US Dollar LIBOR. The transition and the impact on any such holding will be determined by the issuer and communicated as a Corporate Action on the security. If you have any such securities, we will notify you of the Corporate Action when it is notified to us by the Issuer, or take alternative steps for discretionary or advisory portfolios. These should occur on or before June 30th, 2023.
No. If specific action is required by you, we will contact you directly, for instance, through the corporate actions process.
If you have any US Dollar LIBOR based products, we will notify you when the issuer communicates their plan to transition to an alternative reference rate.
If you have any further questions, please contact your Private Banker.