IBOR transition: how Societe Generale supports its clients
The reform of the interbank interest rates known as "IBOR" (InterBank Offered Rate), which will lead to their replacement with alternative "risk free rates" (RFRs), is a challenge for the market actors that have large exposures to them. Especially since the Libor and the Euribor may no longer be available as of 2022. The “IBOR transition” is therefore a complex situation to manage for corporates.
Societe Generale supports its corporate clients by informing them of the progress of the regulatory debate and by helping them to prepare as best as possible for this transition, including tailored advice, according to their exposures. “While the Covid-19 crisis may delay regulatory debates and deadlines on some key rates such as Libor or Euribor, we recommend that our clients address the RFR transition as soon as possible”, says Antoine Jacquemin, Global Head of Market Risk Advisory and Head of Corporate Sales, Western Europe ex. France at Societe Generale.
For contractualisation or issuance of new debt, new financial instruments and variable rates-based vanilla derivatives, corporates can use the RFR rates that were chosen to become the new reference rates, such as Saron (swiss franc), Tonar (yen), Sonia (pound sterling), Sofr (dollar) or Ester (euro).
On the other hand, for the existing stock of products exposed to IBOR, corporates must reshape their portfolios. “We advise our clients to closely monitor the situation and to anticipate. For example, they can convert their fixed-for-IBOR swaps into fixed-for-RFR swaps depending on the level of the IBOR/RFR base on the residual maturity of the swap”, explains Antoine Jacquemin.
Since the beginning of 2020, the levels on the cash market of certain IBOR rates in currencies have several times exceeded that of the RFR rates. For fixed rate-for-floating rate hedging swaps, the Bank offers clients – especially when market conditions are favorable – to switch from Sterling Libor to Sonia and Dollar Libor to Sofr. The liquidity of the Sonia, Ester and Sofr markets should also be analyzed.
Changing rates requires restructuring swaps through restructuring. “Some clients who have implemented Eonia-rate margin call contracts must prepare to change the CSA (Credit Support Annex)’s legal clauses to an Ester reference”, notes Antoine Jacquemin.
Clients can also prepare their transition via fallback clauses which are included in the terms and conditions of the master agreement for derivatives transactions. These clauses define: i) a reference rate that the parties will use in the event of the unavailability of the rate initially provided for, ii) the circumstances or events triggering the rate change, and iii) a spread adjustment reflecting differences between the original rate and the new rate. They reduce uncertainty and the risk of litigation.
Faced with the risk of partial or total termination of Libor or Euribor, European market authorities recommend that professionals include such clauses in contracts to reduce individual and systemic risks. For its part, ISDA implemented this summer a ‘fallback protocol’ that facilitates the inclusion of new exit clauses in existing IBOR derivative transactions between parties that have acceded to this protocol.
In any case, renegotiations of CSA or the insertion of fallback clauses involve additional and time-consuming repapering work and financial contracts amendments. Preparations should be made as soon as possible to avoid renegotiating transactions in an emergency situation in the event of a sudden unavailability of an IBOR rate.
Clients can count on Societe Generale’s teams to remain fully mobilized and available to assist them in their IBOR transition.