IBOR and COVID-19
The International Accounting Standards Board (IASB) has confirmed that IBOR reform will proceed as scheduled, despite COVID-19. ION Treasury is helping corporates prepare for IBOR replacement. Read below for more information.
The journey to replace IBOR
IBOR rates, first published in 1986, have been used as a benchmark for deriving interest rates on debt contracts, and for valuing financial contracts. As of 2017, there were close to 350 trillion USD in outstanding notional linked to it. However, the IBOR deposit market has been subject to manipulation, as these rates have historically been based on judgment and opinion, rather than underlying transactions.
Regulators continue to push for IBOR to be replaced by the end of 2021. As a result, liquidity for these rates is declining.
What will replace IBOR?
IBOR will be replaced with Alternate Reference Rates (ARRs) or Risk-free Reference Rates (RFRs). These ARRs differ significantly from IBOR in a number of areas:
- ARRs are backward looking. Whereas IBOR rates reset in advance using term rates, ARRs reset in arrears through daily compounding. This means that the exact rate you are fixing is unknown until the end of the period.
- ARRs are based on actual transactions, and not just quotes from banks. This makes ARRs less prone to manipulation, and a better representation of the market.
- ARRs do not contain a credit component. While IBOR encompasses a credit component for counterparties, ARRs do not have this built in, which opens up a gap or spread between the two rates that is magnified in times of uncertainty.
This represents a highly significant change in the financial markets.
How is ION Treasury helping corporates prepare for IBOR replacement?
Our support for the end of IBOR, and our roadmap, encompasses three key areas:
- Support of new instruments
- Transition of legacy products
- Benchmark redefinition