Alternative reference rates

July 2021

Alternative reference rates

The financial sector will soon encounter the discontinuation of major [L]IBOR reference rate benchmarks and a consequent transition to alternative rates. Worldwide regulators have recently announced the much-awaited dates regarding the non-representativeness of current rates and affected financial industry participants are taking concrete steps to be prepared for the upcoming shift.

Interbank offered rates ("IBORs") have for years been the benchmark rates adopted in the lending market and in the derivatives, bond, and structured finance markets for a multitude of transactions.

Since the global financial crisis 2007/2008 IBORs have been at the center of numerous criticisms due to manipulation claims against panel banks and due to unclear liquidity forecasts on the interbank markets.

Ever since, the need for new reference rates has grown consistently, resulting in the search for alternative rates by regulators and public and private sector working groups, including the International Swaps and Derivatives Association (ISDA), the Sterling Risk-Free Rates Working Group (SRFRWG), the Working Group on Euro Risk-Free Rates (WGERFR), and the Alternative Reference Rates Committee (ARRC).

Benchmarks

Among the various alternative reference rates on the market, the ones that have proven to be the most representing benchmarks are: SOFR for USD, SONIA for GBP, TONAR for JPY, ESTER for EUR, and SARON for CHF.

The major difference that distinguishes current rates from the new alternatives is that while the former are based on bank surveys, the latter are calculated using real and observed transactions. For example, the Sterling Overnight Index Average (SONIA), the replacement for GBP LIBOR, has been designed by the prominent working groups as the most appropriate risk-free rate for Sterling Overnight Indexed Swaps (OIS). Further, the fact that alternative rates such as SONIA consider a significantly wider range of bank-borrowing transactions underlines a general appetite for moving beyond interbank markets.

Deadlines

Given the global desire to minimize turmoil, especially in such an exceptional market condition, former deadlines have been partially extended. On March 5, 2021, the UK Financial Conduct Authority (FCA) announced the following dates for the discontinuation or non-representativeness of all LIBOR settings:

  • immediately after December 31, 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 June 30, 2023, in the case of the remaining US dollar settings.

What does this mean for our customers?

An interesting question for you at this point is to know what consequences this has for the SCF industry, and, most importantly, what this means for the business relationship with CRX Markets.

First of all, CRX Markets clients can rest assured. CRX Markets is taking the transition very seriously and is working hard with its financing partners for this change to have negligible, if any, impact on the business.

Listed below there are all the details regarding CRX Markets’s implementation of alternative reference rates:

  • In compliance with the existing Master Receivables Purchase Agreements, Terms of Receivables Purchase or Investor Portal Access Agreements (as the case may be), CRX Markets will replace the relevant LIBOR benchmarks in its Supply Chain Finance, Dynamic Discounting and Receivables products.

  • Based on the imposed timelines, we herewith announce that as of June 14, 2021 all new GBP-denominated transactions via the CRX marketplace will no longer use sterling LIBOR as a reference rate benchmark.

  • In line with the recommendations of the SRFRWG and, as a result, the new industry standard, we will use the relevant Forward Looking Term SONIA Rates (Term SONIA) as officially published by one of the recognized benchmark administrators as the alternative reference rate benchmarks instead.
    The Term SONIA rates are, among others, published on https://www.refinitiv.com/en/financial-data/financial-benchmarks/term-sonia-reference-rates or with any other redistributor of such rates. This announcement is only applicable to the replacement of sterling LIBOR in GBP-denominated transactions.

  • Specific announcements for other IBORs and their respective currencies will be made in due course, based on market standards’ development. No further action is necessary at this stage, in particular the legal documentation does not need to be amended as it already reflects the introduction of an alternative reference rate.

In line with the industry’s general desire to make this transition as smooth and frictionless as possible, CRX Markets is proactively adapting to the new market standards.

To accommodate the large investor base, our platform works is designed to support different types of reference rates. CRX Markets is prepared and ready for the change.

Our teams of industry professionals will do whatever it takes to ensure a guided and controlled transition and will be proud to accompany you during this important step offering all the needed support should you have any further concerns.

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