IBOR – Replacement by new reference interest rates

Replacement of IBORs with alternative reference values (RFRs)

Aim of the conversion and which requirements are there?

IBOR describes the common "interbank interest rate" and plays a central role in the international financial markets. It refers to the weighted asking interest rate at which banks grant each other short-term loans and is determined by a bank panel. Since it serves in its various forms as the basis for a variety of financial products, it is relevant for almost all financial market players and their business areas.

Trader-led manipulation of the LIBOR revealed the vulnerability of a private-sector investigation of the IBORs in the recent past. The sharp decline in transaction volumes associated with the loss of confidence led to the recommendation of the Financial Stability Board to replace this practice in the various currency areas with a transaction-based, and thus less manipulable, reference rate method. Deployed working groups have defined methods for the respective currency area for the tamper-proof determination of risk-free rates.

Download IBOR PDF

Download IBOR PDF

In addition to the methods, the working groups have already set the timelines for the replacement of the existing IBORs. This increases the pressure to act, especially for those financial market players for whom multi-currency RFRs are relevant. Against this background, affected contracts must be analysed and products and processes need to be adapted.

Subsequently, the expected challenges will be outlined using the example of the new hybrid EURIBOR. For the euro area, benchmarks from 2020 onwards must be determined precisely and with integrity, in line with the 2016 Benchmark Regulation (2016/2011). According to the current understanding, in addition to a transaction-based determination based on market data, a comprehensible estimate also fulfils this requirement. The EMMI, as the responsible working group, has defined the parameters for the determination of the hybrid EURIBOR in three levels. In addition to using transaction data from the Money Market Statistical Reporting MMSR (Level 1), the EMMI will allow transaction data from near-money market transactions between financial institutions, e.g. Floating Rate Notes from other data sources (Level 2). Also permissible in the case of non-representative reproducibility, Level 3 also estimates the refinancing costs of the panel banks involved. However, the test phase has produced a disproportionate share of estimates (between 57% - 83%)1 which makes a FSMA approval questionable as benchmark-compliant. Alternatively, the use of the ESTER as a basis for EURIBOR-equivalent forward interest rates is considered as a fall-back scenario.

1Results of the EMMI testphase, showed in Regulierungsnewsletter Börsenzeitung 30.10.

In June 2018, the ECB published the methodology for the EONIA successor, ESTER. The ESTER will be introduced according to the current status in October 2019, but with a two-year transitional period until the end of 2021. This will then be determined daily aligned to TARGET2 based on the in the reporting on money market statistics transmitted transaction volumes of the 52 largest banks. Currently a test phase is running.

Challenges for European Financial Institutions

The process chains of the various products, which are based on the different RFRs, are affected front-to-back by the introduction. The short implementation periods for the individual currencies during the years 2019 to 2022 boost already existing pressure.
Strategic and operational challenges

The introduction of the new RFRs requires consideration of multiple aspects and areas within financial services providers and their market environment. By way of example, the following points may be mentioned:

  • Milestone planning of the implementation of requirements considering the different timelines of the respective working groups
  • Review and reorientation of internal hedging and (re-)financing strategies
  • Adjustment of internal pricing models for the valuation of products and positions
  • Analysis of the impact of the replacement of the existing IBORs considering different market conditions (currencies, indices, legal frameworks, customer segments) and decision making on the strategic approach
  • Examine and adjust the legal framework of client and counterparty relationships to minimize potential legal risks
  • Identification and analysis of the product landscape on the assets, liabilities and refinancing side of the financial institutions regarding any necessary adjustments
  • Identification and adaptation of affected processes, IT systems and data interfaces
  • Analysis and decision on how to deal with the transitional parallel validity of IBOR and RFR-based reference interest rates (fallback scenarios)

Why NEXGEN Business Consultants?

Analysis and inventory  

Based on years of experience in the implementation of regulatory requirements and the associated expertise, we have developed an analysis methodology that enables us to efficiently identify new requirements and implement them immediately. In addition, we are also able to perform optimizations of existing setups.

In addition, we have extensive expertise in European reporting requirements and in in-depth settlement and product experience.

    Project steering and controlling  

    We place our clients at the centre of our activity through our efficient, fast and solution-oriented action. Here we pay particular attention to professionalism and consistency during the realization. Successfully carried out projects, high expertise and targeted training of our consultants are our basis to successfully complete projects in a structured and transparent manner.

      High quality and sustainability 

      We operate in a highly professional market environment in which we convince our clients through sustainable competence, continuous willingness to change and high service quality. Our quality standards ensure the highest level of service quality. We not only want to satisfy our clients, but to inspire them in the long term.

        Guido Becker

        Managing Partner

        Tel.: +49 151 223 333 75
        E-Mail: guido.becker@nexgenbc.com

        Ann-Katrin Seidel

        Senior Consultant

        Tel.: +49 160 939 610 87
        E-Mail: ann-katrin.seidel@nexgenbc.com


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        Download IBOR PDF

        Download IBOR PDF


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