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The Reserve Bank of India (RBI) has encouraged banks and financial institutions to cease entering into new financial contracts that reference LIBOR as a benchmark as soon as practicable and and in any case by December 31, 2021.
The central bank also advised banks and financial institutions to encourage their customers to cease entering into new London Interbank Offered Rate (LIBOR) referenced contracts.
Instead of LIBOR, the central bank asked them to use any widely accepted alternative reference rates (ARR).
This directive has been issued to ensure orderly, safe and sound LIBOR transition and considering customer protection, reputational and litigation risks involved, the RBI said in a circular.
LIBOR has been used in the global financial system as one of the benchmarks for a large volume and broad range of financial products and contracts.
According to a 2014 Financial Stability Board report, the cases of attempted market manipulation and false reporting of global reference rates, together with the post (global financial)-crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates.
The “Roadmap for LIBOR Transition” comes in the aforementioned context.
Comprehensive review
The RBI wants banks/financial institutions to undertake a comprehensive review of all direct and indirect LIBOR exposures and put in place a framework to mitigate risks arising from such exposures on account of transitional issues including valuation and contractual clauses.
They may also put in place the necessary infrastructure to be able to offer products referencing the ARR.
The central bank underscored that continued efforts to sensitise clients about the transition as well as the methodology and convention changes involved in the alternatives to LIBOR will be critical in this context.
While certain US dollar LIBOR settings will continue to be published till June 30, 2023, the RBI observed that the extension of the timeline for cessation is primarily aimed at ensuring roll-off of US dollar LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR.
“It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), contracted on or before December 31, 2021,” it added.
MIFOR
RBI said banks are also encouraged to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), published by the Financial Benchmarks India (FBIL), which references the LIBOR as soon as practicable and in any event by December 31, 2021.
FBIL has started publishing daily adjusted MIFOR rates from June 15, 2021 and modified MIFOR rates from June 30, 2021 which can be used for legacy contracts and fresh contracts respectively.
Banks may trade in MIFOR after December 31, 2021 only for certain specific purposes such as transactions executed to support risk management activities such as hedging, required participation in central counterparty procedures (including transactions for hedging the consequent MIFOR exposure), market-making in support of client activities or novation of MIFOR transactions in respect of transactions executed on or before December 31, 2021.
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