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LIBOR frequently asked questions

Preparing for the discontinuation of LIBOR

Impacts

How is Invesco’s LIBOR Transition Program organized and what are the key areas of focus?

Invesco continues to prepare for the impacts stemming from the LIBOR transition via a global LIBOR Transition Program. A roadmap and project plan has been defined; a few of the key activities are listed below:

  • Coordinating the development and refinement of business strategies across investment teams to proactively identify new instruments needed, as well as monitor market liquidity and developments that may inform instrument strategy for transitioning away from legacy LIBOR instruments.
  • Routinely analyze LIBOR exposure data by instrument, currency, maturity date and other classifications to provide an exhaustive global view of Invesco’s LIBOR exposure.
  • Review ongoing LIBOR replacement instruments needs and coordinate any additional development requirements (based off market changes).
  • Continue to confirm system and operational readiness to support the LIBOR transition.
  • Address remaining fund and separately managed account benchmark exposure (e.g., performance target).
  • Update LIBOR referenced documentation (e.g., non-investment contract LIBOR exposure) as needed.
  • Continue to identify, assess, mitigate and monitor LIBOR transition conduct risks.
  • Collaborate closely with LIBOR Transition Program workstreams and firmwide functions to communicate program and market updates across impacted internal Invesco stakeholders.
  • Execute an external communication strategy that informs clients of LIBOR related impacts (e.g., website content).
  • Address incoming client & regulatory LIBOR related requests.
  • Support updating LIBOR related fund and corporate risk disclosures.

To support the execution of the aforementioned activities, the LIBOR Transition Program has a defined workstream structure (e.g., Investments, Communications and Governance), that includes input from a variety of functional groups. The program structure and team will evolve as needed. To oversee the progress of the transition program and to help identify and address risks that may arise, Invesco reports into a Steering Committee.

Participants in the Steering Committee include members of senior management from the various impacted areas of the organization. LIBOR Transition Steering Committee meetings are held periodically to review progress, resolve issues, challenge assumptions and provide direction to the LIBOR Transition Program. Additionally, the program updates relevant investment advisor boards periodically. 

What is Invesco doing to understand the potential impacts of LIBOR discontinuation and transition to alternative reference rates (ARRs) on clients?

Invesco is committed to working closely with regulators, market participants and industry bodies. Invesco is also participating in industry discussions and following developments in evolving areas so that Invesco can adopt approaches and strategies that are consistent with industry best practices.

In order to assess the impact of LIBOR transition on client portfolios and to support the transition, Invesco has been reviewing investment team portfolios with LIBOR exposure and conducting fallback language analysis. This review aims to determine the type and scope of that exposure and to assess the applicable LIBOR transition options.

What will Invesco be doing to mitigate the potential impacts of LIBOR discontinuation and transition to ARRs on clients?

Invesco supports the market transition away from LIBOR and is committed to keeping clients informed of the potential impacts. Invesco has established a comprehensive global LIBOR Transition Program with a dedicated team of subject matter experts to manage the impact of the transition. Based off the identified areas that are impacted by the transition, a remediation plan has been defined and executed upon. For example, new instruments have been developed to support alternative reference rate products. The Invesco LIBOR Transition Program continues to monitor impacts and address accordingly in advance of LIBOR cessation.

What does Invesco see as possible impediments to meeting any LIBOR transition deadlines?

At this point, Invesco does not see any internal major impediments. Invesco has identified, measured, monitored, and controlled financial and non-financial risks of the transition, and established processes and oversight routines for ongoing management.

Invesco’s LIBOR Transition Program has identified key transition risks, created a mitigation plan, and continues to provide management information on these factors. There are frequent touchpoints with Invesco leadership to provide updates. Invesco, like the rest of the industry, is monitoring regulatory guidance and market developments, adjusting transition plans as necessary. There are external dependencies in executing on Invesco’s LIBOR transition plan such as market adoption of SOFR, etc. Invesco continues to monitor these factors and adjust accordingly.

Does Invesco foresee any issues with finding suitable and liquid instruments to replace LIBOR-linked assets?

Invesco is monitoring the development of liquidity in ARR products in different asset classes and currencies to define the strategy and timing of its transition.

Invesco welcomes the recent new use restriction on USD LIBOR, particularly as it will help accelerate the industry-wide transition away from the outgoing rate. Invesco also continues to monitor the market adoption of alternative reference rates, whether it is the regulator preferred SOFR or credit sensitive rates such as BSBY, Ameribor, and Critr. Invesco does not expect that credit sensitive rates will have a dominant place within the market, however for portions of certain asset classes, credit sensitive rates may be considered based on investment team discretion.

Describe the risks the LIBOR transition poses to your investment strategy and how it compares to other risks typically incurred by your investment strategy.

Invesco’s investment teams will continue to execute and evolve their investment / business strategy in transitioning from LIBOR to ARRs. Moving away from LIBOR presents many challenges such as remediating legacy LIBOR exposure, adopting new replacement rates, managing an evolving credit spread adjustment environment (stemming from the fundamental differences between LIBOR and SOFR), among others. For example, SOFR historically has not spiked in periods of market volatility to the extent that LIBOR has. Because of this, there are challenges using SOFR as a hedging instrument. Regular discussions are held with investment teams to address investment strategy key considerations. A centralized LIBOR Transition Program assists in collaborative knowledge sharing.

Overall, this ongoing investment discussion and review process factors in the impact of various market conditions, such as alternative reference rate liquidity, in defining the necessary next steps to limit the impact of the LIBOR transition on clients.

Are there any restrictions on adding new positions that use LIBOR that extend beyond LIBOR's termination date?

To drive consistency across investment teams in addressing legacy LIBOR holdings, new ARR issuances and new LIBOR issuances, the LIBOR Transition Program provides investment team business strategy recommendations and requirements. This program guidance is meant to help portfolio managers understand the risks associated with adding LIBOR linked instruments to portfolios, as well as other impacts stemming from the LIBOR transition. Moreover, investment teams are required to review the fallback language of all LIBOR instruments prior to purchasing investments to assess the adequacy of such language. These program requirements and recommendations are updated routinely to account for market updates and regulator guidance. As of January 2022, Invesco has adopted the following guidance with investment teams:

  • For UK domiciled funds, the LIBOR Transition Program requires investment teams to cease new investments in all primary market LIBOR (JPY, CHF, USD, GBP, EUR) securities and loans issued after 12/31/21. No USD LIBOR linked derivatives can be acquired (there are no exceptions)
  • For US domiciled funds, the LIBOR Transition Program requires investment teams to cease new investments in all primary cash product USD LIBOR securities and loans issued after 12/31/21 unless there is adequate fallback language or a clearly defined remediation strategy. The LIBOR Transition Program requires investment teams to adhere to exceptions for entering into new USD LIBOR derivatives.
  • Any new investments in all secondary market LIBOR securities and loans require adequate fallback language or a clearly defined remediation strategy (e.g., sell out)
  • Investment teams are required to complete the fallback language analysis for all LIBOR and other IBOR referenced legacy investments excluding derivatives and USD agency securities
  • The LIBOR Transition Program requires investment teams to enter into SONIA referenced Interest Rate Derivatives instead of GBP LIBOR Interest Rate Derivatives.

How is Invesco remediating legacy LIBOR linked positions?

Investment teams have defined a business plan to address legacy LIBOR positions. This business plan considers Invesco’s evolving program requirements and recommendations, as well as market and regulatory guidance. Detailed and specific position level remediation plans for post-June 30, 2023 LIBOR exposure are being defined and will be tracked leading up to cessation. The fallback language of legacy LIBOR linked positions has been assessed and is tracked via a repository where investment teams are able to share insights in terms of remediation plans, such as consent solicitations. Guidance related to tough legacy solutions across jurisdictions is routinely provided to investment teams - this guidance is helpful in determining a remediation plan for positions that do not have fallback language. Legacy LIBOR exposure reductions are tracked month-over-month (by investment team, asset class, etc.) and shared with program leadership. Effectively, investment teams have the following remediation options for LIBOR linked positions and have bucketed positions into the appropriate category:

  • Selling out
  • Position is expected to be called
  • Leverage legislative solution (note in some jurisdictions, this has yet to be defined)
  • Contract amendment (e.g., exchange offer or consent solicitation)
  • Position has adequate fallback language, thus will use new rate upon cessation trigger event
  • Other

How is Invesco measuring and quantifying LIBOR / ARR exposure on a recurring basis?

Invesco has a dedicated team that analyzes LIBOR exposure (in terms of instruments held that reference LIBOR), sharing results internally on a monthly basis. The exposure data includes analyzing instruments based on notional, market value, trade count and certain risk metrics. Invesco also tracks ARR exposure in a similar manner.

How is Invesco measuring and quantifying ARR adoption on a recurring basis?

Invesco actively monitors the market liquidity of instruments indexed to ARRs (e.g., SOFR, SONIA, etc.). For derivatives, portfolio managers and analysts review the Risk Free Rate (RFR) Adoption Indicator published by ISDA to track how much global trading activity (as measured by DV01) is conducted in cleared OTC and exchange-traded interest rate derivatives that reference ARRs. Liquidity in cash-based instruments indexed to ARRs also monitored with investment teams tracking ARRs as a percentage of total issuances for certain instruments.

Are there any remaining system changes that will be required in Invesco’s move away from LIBOR and what are your plans in this regard?

The Invesco operations team is working closely with the investment, legal, and technology teams to identify any outstanding process and system enhancements necessary to support both legacy-LIBOR instruments and new ARR-linked instruments. This includes processes and systems related to fallback processing, instrument conventions and interest calculation methodologies. Invesco is also engaging with third party service providers to understand their LIBOR transition readiness and ability to support impacted instruments and asset classes.

What is Invesco’s approach to updating fund benchmarks or performance targets?

Invesco has identified the funds and separately managed accounts that have fund benchmarks or performance targets tied to LIBOR or another IBOR set to be discontinued. The replacement rates must be approved internally, according to  defined product development process. Once finalized, the replacement rates will be communicated to clients, with the replacement rate being implemented before cessation. The proposed replacement rates were determined by identifying a similar rate to LIBOR (e.g., a like for like comparison).

Where can I obtain more information?

Invesco will seek to update this page periodically as market developments occur and industry announcements are made. In addition, should you seek general information on LIBOR transition, please consider reviewing published information from regulators, working groups and other industry bodies.

Background

What is LIBOR?

The London Interbank Offered Rate or “LIBOR” is an interest rate benchmark that is widely used for short-term interest rates, providing an indication of the average rates at which certain banks (referred to as LIBOR “panel banks”) could borrow from other banks on an unsecured basis for set periods of time and in particular currencies. LIBOR is based on submissions from panel banks of the rates they either pay or would expect to pay to borrow from other banks.

What is the difference between IBOR and LIBOR?

Interbank Offered Rate (IBOR) is a broad term which defines various reference rates used to determine the rate at which banks can lend and borrow from one another. For example, reference rates such as: EURIBOR, TIBOR and LIBOR could all be referred to as IBORs. The term LIBOR refers to a specific IBOR which is based on submissions from panel banks and denominated in five currencies (CHF, EUR, GBP, JPY and USD).

How is LIBOR used?

1.    To calculate interest payments for products such as loans, derivatives and bonds.

2.    As a performance target or benchmark for investment funds.

3.    To value certain products.

4.    In investment objectives.

5.    To calculate discount rates or performance ratios.

6.    To assess market expectations regarding central bank interest rates and liquidity in the interbank lending market.

7.    As an indicator of the health of the banking system.

8.    For operational activities, including valuation curves, stress testing, pricing and asset allocation models.

Why is LIBOR important?

LIBOR is by far the most prevalent floating rate index worldwide. For example, if a loan has a floating rate (an interest rate that fluctuates over the duration of the contract), then that interest rate will often be based on LIBOR. LIBOR is most frequently used for derivatives, which make up approximately 90% of the roughly US$350 trillion worth of financial products linked to LIBOR. The Alternative Reference Rate Committee (US working group) estimates that as of March 2021 there were US$223 trillion in outstanding exposures to USD LIBOR (link). USD LIBOR is the most used setting of LIBOR across currencies.

When will LIBOR be phased out?

The Financial Conduct Authority (FCA), the regulator that oversees LIBOR announced on March 5, 2021 the dates that LIBOR rates will cease to be published or will no longer be representative:

  • Immediately after December 31, 2021, in the case of all British pound sterling (GBP), euro (EUR), Swiss franc (CHF) and Japanese yen (JPY) settings, and the 1-week and 2-month US dollar (USD) settings; and
  • Immediately after June 30, 2023, in the case of the remaining USD settings

Note that the FCA has permitted use of 1-month, 3-month, 6-month GBP and JPY LIBOR for use in 2022, using a revised methodology (“synthetic LIBOR”). This was determined via an industry consultation and is meant to assist in remediating legacy exposure by providing additional time to transition. Synthetic LIBOR is a non-permanent, bridge solution and is only guaranteed for 2022 (with possible annual renewal for up to 10 years for GBP LIBOR).

What are the impacts of the FCA announcement confirming LIBOR cessation dates?

Beyond providing market clarity on dates that LIBOR will cease, particularly for the five tenors of USD LIBOR that Ice Benchmark Administration (IBA) consulted on (link), this announcement constitutes an index cessation event under the International Swaps and Derivatives Association Inc.’s (ISDA) IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol (link) as well as the Alternative Reference Rate Committee’s fallback language for non-consumer cash products (link), giving the market clarity on the spread adjustments to ARR based fallbacks for all EUR, CHF, GBP, JPY and USD LIBOR settings. The fixed spread adjustment for each LIBOR tenor has been published by Bloomberg and can be found at this link. Additionally, Refinitiv was selected by the Alternative Reference Rates Committee (ARRC) to publish the recommended spread adjustments and spread adjusted rates for cash products. Refinitiv has begun publishing these cash product fallback rates – which align to what Bloomberg publishes for ISDA for non-consumer products (link).

Refer to Invesco’s thought leadership article on this topic (link).

What caused the need to stop using LIBOR?

The integrity of LIBOR was questioned during the 2008 financial crisis when several banks contributing to its calculation were accused of rate manipulation. A contraction in the unsecured interbank lending market has also occurred in the years since the financial crisis. Attempts to base LIBOR on actual transactions failed, as the underlying market which LIBOR seeks to measure is no longer sufficiently active. By contrast, these ARRs are based on overnight lending markets rates, which are generally considered to be more liquid.

What are the inherent issues with LIBOR and how will they be addressed in LIBOR’s replacement?

LIBOR is inherently subjective as panel bank submissions are not necessarily rooted in actual transactions or data. Despite governance put into place since the financial crisis, LIBOR still relies on bank estimates. The LIBOR replacements differ in how they function across the world (more on that in the Alternative Reference Rates section), but they seek to improve objectivity and transparency by being rooted in a large volume of actual transactions.

Who governs the LIBOR transition?

Working groups have been established in each of the jurisdictions that have LIBOR produced in their currency. For each currency LIBOR variant, the working groups have identified an alternative reference rate and are developing plans to transition each market to the new ARRs. In some jurisdictions, the new ARRs may coexist alongside the relevant IBORs, such as EURIBOR in Europe and JPY TIBOR in Tokyo, in a multi-rate environment. While each working group is focused on their specific currency transition, there is a global effort to work across jurisdictions in recognition of the global impacts of LIBOR transition. The working group in the US is the Alternative Reference Rate Committee (ARRC) and in the UK is the Working Group on Sterling Risk-Free Reference Rates. Additionally, the International Swaps and Derivatives Association, Inc. (ISDA) is focused on the transition of the derivatives markets to ARRs.

What else is changing?

Some IBORs are being reformed so that they are calculated wherever possible by reference to actual transactions (e.g., EURIBOR and JPY TIBOR). While these IBORs may continue to exist alongside the relevant ARRs, it is expected that other IBORs will be permanently discontinued, such as EONIA (Euro Overnight Index Average) which was discontinued on January 3, 2022. EONIA’s replacement is €STR (Euro Short-Term Rate).

What does the transition look like for EURIBOR?

In the European Union, a multiple rate approach is being taken where EURIBOR and €STR coexist. EURIBOR is currently the most frequently used EUR-denominated interbank offered rate. There have been reforms made to EURIBOR’s methodology in order to make it compliant with the regulatory requirements put forth in Benchmark Regulation (BMR). EURIBOR is expected to continue alongside €STR = and there is no current indication it will cease in the near future based on ECB announcements (link). However, the ECB recommends using €STR as a fallback rate in the case that EURIBOR ceases to exist (link). The long-term sustainability of EURIBOR depends on continued willingness of the panel of contributing banks to support it and sufficient activity in its underlying market. Invesco is monitoring EURIBOR exposure including fallback language in new EURIBOR investments in-case a cessation date is announced in the future.

Why is the transition from LIBOR a challenge?

There are multiple challenges as part of the transition. While firms are pivoting away from LIBOR in new transactions (particularly given the new use restriction of USD LIBOR, with minimal exceptions – link), significant amounts of legacy debt and derivatives products will continue to reference the benchmark after cessation dates, when the relevant LIBOR will be discontinued. Additionally, ARRs and LIBORs are distinctly different. No ARR will be equivalent to the related LIBOR because of structural differences between the two. Investment and operational processes will need to adapt to address these issues. There are also significant contractual remediation challenges for existing LIBOR contracts that extend beyond cessation dates. While the ISDA Protocol assisted in providing a pathway for existing derivative contracts away from LIBOR, for certain cash products there remain significant hurdles such as increasing adoption and liquidity of ARR referencing cash products. US Federal LIBOR Legislation passed in March 2022 and provides a path away from USD LIBOR for contracts governed under US federal or US state law. This law is critical in assisting the industry wide transition away from LIBOR for the estimated US$1.9 trillion in USD LIBOR exposures that will remain in bonds and securitizations after cessation on June 30, 2023 (link). Note that the following areas are not covered by the US Federal LIBOR Legislation:  a) Swap-derived benchmarks, b) USD LIBOR under Non-US Laws and c) GBP, CHF, EUR, JPY , 1-week and 2-month tenors of USD LIBOR under US Law.

Which rates are likely to replace LIBOR?

Alternative reference rates (ARRs) are likely to replace or have already replaced LIBOR. ARRs differ based on jurisdiction but generally are overnight interest rate benchmarks which are perceived by regulators to be more representative and reliable than LIBOR. This is because these benchmarks are intended to be based on liquid markets and so they can be calculated by reference to actual transactions. The table below shows the working group recommended replacement ARRs across currencies.

 LIBOR Currency

 Proposed Alternative Reference Rate

 US Dollar (USD)

 SOFR (Secured Overnight Financing Rate)+

 Sterling (GBP)

 SONIA (Sterling Overnight Index Average)*

 Euro** (EUR)

 €STR (Euro Short-Term Rate)*

 Swiss Franc (CHF)

 SARON (Swiss Average Rate Overnight)+

 Japanese Yen*** (JPY)

 TONAR (Tokyo Overnight Average Rate)*

+ Based on secured transactions
* Based on unsecured transactions
**Reformed EURIBOR may be an additional potential reference rate
***JPY TIBOR may be an additional potential reference rate

How similar are the ARRs across currencies?

They vary. Some ARRs are secured (i.e., based on actual overnight transactions and secured by collateral), while others are unsecured. Additionally, the ARRs have unique market reference points (i.e., SONIA is based on overnight wholesale deposit transactions, while SOFR is based on multiple overnight Treasury repo market segments).

What are the replacements for other IBORs (not just LIBOR)?

As noted above, EURIBOR in the eurozone and JPY TIBOR in Japan are expected to exist in 2022 and beyond. Additionally, BBSW in Australia, CDOR in Canada*, HIBOR in Hong Kong and SIBOR** in Singapore are expected to exist in 2022 and beyond, in addition to the ARRs in these currencies. It is possible that some market participants may choose to use IBORs. However, some of these IBORs are subject to reform because they suffer from similar issues to LIBOR; thus market participants may prefer to use ARRs instead. The replacements for IBORs continues to be discussed throughout the industry.

Additionally, credit sensitive rates, such as the American Interbank Offered Rate (Ameribor), Credit Inclusive Term Rate (Critr) and Bloomberg Short-Term Bank Yield (BSBY), have been proposed as alternatives to USD LIBOR and SOFR. Regulators within the US, as well as around the world, have denounced credit sensitive rates as a viable alternative to LIBOR. However, many market participants (such as banks) prefer credit sensitive rates as they may more closely match their cost of funding since the rates are unsecured and have an element of bank credit risk incorporated. The market has yet to widely adopt credit sensitive rates, however, they remain a significant part of the conversation regarding transitioning away from LIBOR.

*6-month and 12-month Canadian Dollar Offered Rate (CDOR) have already been discontinued (link); note that the expected cessation date for other tenors of CDOR is June 30, 2024 (link)

**6-month Singapore Interbank Offered Rate (SIBOR) will be discontinued on March 31, 2022. 1-month and 3-month SIBOR will be discontinued by the end-2024 (link)

How are the proposed alternative reference rates (ARRs) different than LIBOR?

The ARRs differ from LIBOR in three main ways:

 1 

ARRs are overnight rates which are published at the end of the overnight borrowing period. This means they are “backward-looking.” In contrast, LIBOR is a term rate (i.e., it is a rate to borrow for a period of time such as 3 months or 6 months) and it is published at the beginning of the borrowing period. This means LIBOR is “forward-looking.

     2

LIBOR also includes a premium for interbank credit risk (i.e., an additional amount to account for the risk that the borrowing bank may not be able to repay the interbank borrowed from). Some ARRs are based on secured borrowing in which case they would not reflect interbank credit risk and all ARRs are overnight rates, which do not contain a term credit premium.

 3

LIBOR also measures the same market in all currencies. The ARRs measure different markets. For example, the ARRs for US Dollar and Swiss Franc are based on secured markets whereas the ARRs for Sterling, Japanese Yen and Euro are based on unsecured markets. This means that different ARRs are likely to behave slightly differently.

What impact will this change have on investors / clients?

LIBOR discontinuation will result in a variety of impacts that investors / clients should be aware of. Note that this list is not exhaustive, rather a summary of high-level areas impacted.

  • Impact to performance and valuation of instruments
  • Client agreements referencing LIBOR will need to be amended
  • Existing instruments referencing LIBOR will need to be remediated to support transition to the relevant ARR
  • Portfolio composition will change as ARR instruments replace LIBOR instruments

What impact will this change have?

LIBOR discontinuation will result in two primary impacts that investors should be aware of. Note that this list is not exhaustive, rather a summary of high-level areas impacted.

Value Transfer

There may be significant changes to the valuation of LIBOR-based portfolios (i.e., value transfer) as no replacement benchmark is likely to be neutral to all industry participants and counterparties, and due to the uncertainty surrounding the future liquidity of LIBOR markets.


Benchmarks and Strategy

Certain investment strategies and hedging might require revisions to address changes in liquidity post LIBOR transition. Updates to performance benchmarks for LIBOR based funds will also be required.

How has liquidity developed in ARR markets?


Liquidity has developed in each market and product differently. Below is a summary by product based on external data (as of December 2021):

Floating Rate Notes:

Floating Rate Notes (FRNs) – USD

  • SOFR FRN issuances have made up a majority portion of issuances (>60%) for all of 2021 – and the trend continued into December where SOFR as a percentage of the total USD FRN issuances was approximately 96%.
  • The trends point to consistent liquidity for USD FRN issuances indexed to SOFR.
  • Note that future new issuances of USD LIBOR referencing FRNs in 2022 is expected to be very minimal given regulatory announcements related to this (link).

FRNs – GBP

  • SONIA FRN issuances as a percentage of total GBP FRN issuances have remained consistent through 2020 and Q1 2021, with SONIA FRN issuances in December making up 99% of market activity. All issuances of GBP FRNs have been indexed to SONIA since October 2020.

FRNs – EUR

  • ESTR indexed FRNs are not a significant percentage of Euro-denominated FRN issuances. In 2021, only four months have seen ESTR indexed FRN issuances, and in those months, ESTR as a percentage of total Euro-denominated FRN issuances was less than 10%. Liquidity has yet to develop for FRN issuances indexed to ESTR.
  •  Euribor is the default cash rate in this jurisdiction (i.e., new loan issuances are tied to Euribor).

Derivatives:

Derivatives – USD

  • Observed trends point to a developing liquidity in the market for SOFR indexed IRDs, particularly given the ARRC’s “SOFR First Initiative” and the interdealer convention changes from USD LIBOR to SOFR in the swap and cross-currency markets. Note there are allowable exceptions for new use of USD LIBOR derivatives after 2021 (link)
  • Market making in support of client activity related to US dollar LIBOR transactions executed before January 1, 2022
  • Transactions that reduce or hedge the supervised entity’s or any client of the supervised entity’s US dollar LIBOR exposure on contracts entered into before January 1, 2022
  • Novations of US dollar LIBOR transactions executed before January 1, 2022
  • Transactions executed for the purposes of participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting US dollar LIBOR exposure
  • Interpolation or other use provided for in contractual fallback arrangements in connection with the US dollar LIBOR settings that will cease at December 31, 2021 (i.e., the 1-week and 2-month settings

Derivatives – GBP

  • SONIA based IRDs appear to offer ample liquidity to market participants, with trends pointing to a decrease in GBP LIBOR issuances.

Derivatives – EUR

  • The market for ESTR is still yet to develop and does not offer liquidity to market participants.

Derivatives – JPY

  • TONAR based interest rate derivatives (IRDs) offer ample liquidity to market participants, with trends pointing to a decrease in JPY LIBOR/TIBOR issuances.

Derivatives – CHF

  • SARON based IRDs offer ample liquidity to market participants, with trends pointing to no CHF LIBOR issuances.

Note that the sources for this information are varied, but generally include data from Bloomberg, CME, ISDA, and other widely available industry sources. You are encouraged to review the most up to date information on ARR liquidity from these sources.

What is a “fallback”?

A “fallback” refers to the language in a document that lays out the process through which a replacement interest rate will be identified and implemented if the benchmark interest rate (e.g., USD 3-month LIBOR) referenced in the document is permanently discontinued (a permanent cessation fallback) or announced by an official source to be no longer representative of the underlying market (a pre-cessation fallback). Fallback language within a document acts as a how-to guide for identifying the replacement interest rate should the original benchmark rate be unavailable or non-representative. For example, a USD LIBOR fallback provision would have the document switch to SOFR as the benchmark rate plus a defined credit spread adjustment upon LIBOR becoming unavailable or non-representative.

Who is assisting in proposing new fallback language?

Industry associations have mobilized around LIBOR fallback language reform, with the ISDA leading efforts globally for derivatives. Additionally, national working groups have been engaged on similar enhancements for cash products, most prominently led by the US focused ARRC. Both ISDA and national working groups make recommendations regarding fallback language for market participants’ voluntary use in contracts with the goal of reducing the risk of serious market disruption in the event that the relevant LIBOR is no longer usable. Feedback on proposed fallbacks is generated via industry wide consultations.

What has ISDA done to assist the market with transitioning away from LIBOR for derivatives?

ISDA has been working on an initiative at the request of the Financial Stability Board’s Official Sector Steering Group (FSB OSSG) since 2016 to identify robust fallbacks for derivatives contracts that reference LIBOR. ISDA conducted several industry consultations since 2018 to finalize the methodology for permanent cessation and pre-cessation fallbacks.

Most notably, ISDA released the Interbank Offered Rate (IBOR) Fallbacks Supplement (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol) on October 23, 2020 (link). The Supplement amends ISDA’s standard definitions booklet for interest rate benchmarks to incorporate robust fallbacks for derivatives linked to or referencing certain LIBORs. The Protocol enables counterparty pairs to incorporate these robust fallbacks into legacy non-cleared derivatives trades if both parties choose to adhere to the Protocol. The new fallbacks are based on adjusted versions of the risk-free rates identified as alternatives to LIBORs in the relevant jurisdictions. The Supplement and Protocol became effective on January 25, 2021. From that date forward, all new cleared and non-cleared derivatives trades that reference the definitions will include the fallbacks. The fallbacks for a particular currency will apply following a permanent cessation of the LIBOR in that currency.

ISDA has also published a multitude of other resources (e.g., EONIA Collateral Agreement) to assist with the LIBOR transition that can be found at this link.

What types of securities/instruments are affected by the Protocol?

The Supplement and Protocol impact interest rate derivative contracts and other over-the-counter derivatives that are linked to or reference certain LIBORs. The Supplement allows market participants to incorporate robust fallbacks into these derivatives while the Protocol allows for the incorporation of these robust fallbacks into legacy non-cleared derivatives if both parties choose to adhere to the Protocol (by incorporating the Supplement into the existing trade documentation). Cash based securities, such as equities, bonds, floating rate notes, loans, asset-backed securities, and collateralized mortgage obligations are not impacted by the Supplement or the Protocol.

What LIBORs are in scope of the Supplement and the Protocol?

The relevant LIBORs that are in scope of the Supplement and the Protocol include: sterling LIBOR, Swiss franc LIBOR, US dollar LIBOR, euro LIBOR, the euro interbank offered rate (EURIBOR), the Japanese yen LIBOR, the Japanese yen Tokyo interbank offered rate, the euroyen Tokyo interbank offered rate, the Australian bank bill swap rate, the Canadian dollar offered rate, the Hong Kong interbank offered rate, the Singapore dollar swap offer rate, and the Thai baht interest rate fixing. Note that in December 2021, ISDA published a new set of fallbacks for derivatives referenced to IBORs not covered by ISDA’s initial fallbacks rollout (link). These fallbacks cover IBORs in India (MIFOR), Malaysia (KLIBOR), New Zealand (BKBM), Norway (NIBOR), the Philippines (PHIREF) and Sweden (STIBOR), ensuring a robust replacement based on risk-free rates would automatically take effect if any of those benchmarks permanently ceases to exist.

What’s required of Invesco to comply with fallback language changes?

Invesco must first understand the current fallback language in impacted contracts (if any) to assess whether the fallback is appropriate and if not to determine appropriate remediation strategies (e.g., sell the instrument in advance of cessation of LIBOR vs. negotiation with a counterparty/issuer). For OTC derivatives, Invesco has elected to adhere to the Protocol on behalf of its managed funds and accounts.

What have regulators done to address ‘tough legacy’ contracts?

Tough legacy contracts are contracts that have maturities past the LIBOR cessation date of the end of 2021 or of June 30, 2023 for the remaining tenors of USD LIBOR, but don’t have appropriate fallback language that will allow the contract to move to a new fallback replacement rate after a cessation trigger event and are unable to be amended to include appropriate fallback language. This is likely to occur where, for example (i) contracts form part of complex transactions or arrangements, (ii) distribution is broad and there may be additional complications with obtaining the necessary consent or (iii) retail investors/counterparties are involved. Thus, the contract will continue to reference LIBOR after LIBOR is discontinued. Global legislative bodies are therefore working towards a solution, with various approaches taken.

In the US, some states (e.g., NY, GA, AL) sought to create legislative solutions for USD LIBOR referencing contracts governed under that particular state law that do not have adequate fallback language. For example, in NY this legislation passed and came into effect on March 31, 2021 (link). More recently, with the passage of a US federal solution, there is now a remedy for all tough legacy non-swap derived USD LIBOR referencing contracts governed under US federal or US state law.

Note that for GBP and JPY LIBOR a synthetic version of LIBOR has been approved for use in tough legacy contracts for 1-month, 3-month and 6-month GBP and JPY LIBOR for 2022 (link). Note that synthetic LIBOR is only guaranteed for 1 year, with potential annual renewal for up to 10 years for GBP LIBOR. JPY LIBOR synthetic LIBOR will only be available for one year. Firms should continue to actively transition their legacy exposure to alternative rates.

In the EU, the European Central Bank has proposed similar legislation to the UK and US to allow the European Commission to have the power to mandate which ARR must be used. To choose a reference rate, the Commission will take into account recommendations from national industry groups across the world.

Did Invesco and Invesco’s counterparties adhere to the ISDA Protocol?

Invesco adhered to the Protocol on behalf of its managed funds and accounts. Additionally, Invesco’s derivatives counterparties adhered to the Protocol.

Invesco will continue to monitor any additional protocols released by ISDA and determine if Invesco will adhere (as well as monitor counterparty adherence). Invesco will also continue to plan for any potential CCP conversion events, in the event that LCH and CME leverage a conversion event for USD LIBOR linked derivative products. 

Has Invesco identified the population of tough legacy contracts?

Yes, Invesco has inventoried and rated the fallback language of LIBOR-linked positions. A position level remediation plan has been defined based on the adequacy of fallback language, governing jurisdictions, type of product, and other factors.

December 31, 2021 Cessation

What is SONIA?

The Reformed Sterling Overnight Index Average (SONIA) is the ARR for the British Sterling currency. SONIA is a measure of the rate at which interest is paid on unsecured overnight sterling transactions.

Who is in charge of the transition process away from LIBOR for GBP-denominated instruments to SONIA?

The Working Group on Sterling Risk-Free Reference Rates is overseeing the transition and will lead the transition away from LIBOR in the UK. This working group was established in 2015 and in April 2017 recommended the SONIA benchmark as the preferred ARR. Since then, the working group has been focused on how to transition to using SONIA across sterling markets.

Who produces and administers SONIA?

The Bank of England (BoE), supported by the SONIA Oversight Committee and SONIA Stakeholder Advisory Group, publishes SONIA on its website each London business day at 9:00am local time. In addition to the headline rate, additional rates at percentiles of volume are provided. Publication of SONIA began in 1997, was taken over by the BoE in 2016 and was reformed in April 2018.

Why was SONIA chosen as the preferred alternative to LIBOR?

1.    SONIA has the capability to evolve over time so it is robust to changes in its underlying markets.

2.    SONIA tends to be predictable.

3.    SONIA is referenced in the already liquid sterling overnight indexed swap (OIS) market making transition easier.

Note that SONIA has become the dominant replacement for GBP LIBOR after the cessation of GBP LIBOR on December 31, 2021.

What are the differences between LIBOR and SONIA?

LIBOR and SONIA are fundamentally different in several ways, such as how they are calculated and administered. Below is a comparison:

 Characteristic

SONIA

LIBOR

Risk

Risk free rate (no credit risk)

Bank lending rate (includes credit risk)

Forward vs. Backward Looking

Overnight (backward looking)

Forward looking

Secured vs. Unsecured

Unsecured (no collateral)

Unsecured (no collateral)

Calculation and Publication

Calculated and published daily by the BoE

Calculated and published daily by ICE Benchmark Administration

Basis

Transaction based (calculated by overnight wholesale sterling deposit transactions)

Based on LIBOR panel banks

Term Structure

Term structure available with options provided by multiple firms, including Refinitiv and IBA

Term structure

What is Invesco’s approach to remaining GBP LIBOR exposure that currently references synthetic GBP LIBOR?

Invesco continues to monitor any regulatory announcements related to the potential annual renewal of synthetic GBP LIBOR. For the contracts that are referencing synthetic GBP LIBOR currently, there is a defined remediation plan that is being followed. As the Financial Conduct Authority (FCA) and other regulators have noted, synthetic GBP LIBOR is meant to be a temporary, bridge solution for legacy exposure. Invesco is following that same approach, with active efforts to amend contracts that have inadequate fallback language.

June 30, 2023 Cessation

Who is in charge of the transition process away from LIBOR for USD-denominated instruments to SOFR, the USD LIBOR replacement and ARR?

The ARRC is overseeing the transition and will lead the transition away from LIBOR in the US. The ARRC is a group of private-market participants initially convened by the Federal Reserve (Fed) in December 2014, in cooperation with other US federal financial services regulatory authorities. The ARRC recommended best practices, the ARRC Guide on the Endgame for USD LIBOR and the Progress Report: The Transition from U.S. Dollar LIBOR are some of the key documents that set forth important transition activities and milestones. Additionally, ISDA is leading the transition of the USD LIBOR derivatives markets to SOFR. ISDA and the ARRC have worked closely together to confirm alignment in their goal: transitioning away from USD LIBOR.

Who produces and administers SOFR?

The New York Fed publishes SOFR on its website on a daily basis, at approximately 8 a.m. EST. SOFR represents a broad measure of the cost of borrowing cash overnight in the repo market collateralized by Treasury securities. Publication of SOFR began in April 2018.

Is SOFR available to use now?

Yes. SOFR derivative and cash products are available. As LIBOR cessation continues to approach, market adoption and liquidity are expected to continue to grow. In July 2021, the ARRC formally endorsed Term SOFR (link), which was the final step in the ARRC’s Paced Transition Plan. Term SOFR is welcomed by market participants and is likely to further accelerate SOFR adoption in the cash markets. The ARRC also released the conventions (link), recommended best practices for Term SOFR (link), and FAQs (link).

What are the differences between LIBOR and SOFR?

LIBOR and SOFR are fundamentally different in several ways, such as how they are calculated and administered. Below is a comparison:

Characteristic

SOFR

LIBOR

Risk

Risk free rate (no credit risk)

Bank lending rate (includes credit risk)

Forward vs. Backward Looking

Overnight (backward looking)

Forward looking

Secured vs. Unsecured

Secured (collateralized)

Unsecured (no collateral)

Calculation and Publication

Calculated and published daily by the NY Fed

Calculated and published daily by ICE Benchmark Administration

Basis

Transaction based

Based on LIBOR panel banks

Term Structure

Term structure available (note the ARRC supports the use of term SOFR for business loans, as well as limited uses in end-user facing derivatives used for hedging purposes)

Term

What are some of the consequences of moving from LIBOR to SOFR?


While there are many implications as a result of moving from LIBOR to SOFR, one of the most critical impacts is that an unintended “value transfer” can occur when transitioning existing LIBOR-based financial products to SOFR, as no replacement benchmark is likely to be neutral to all industry participants and counterparties. The ARRC has addressed the value transfer that is expected to occur by recommending a credit spread adjustment be added to SOFR when SOFR is used to replace LIBOR in an existing financial product. On April 8, 2020, the ARRC recommended a credit spread adjustment calculation methodology for cash products referencing USD LIBOR. This spread adjustment methodology is based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR. This methodology aligns with ISDA’s recommended credit spread adjustment methodology for derivatives.

On March 5, 2021, with the FCA’s confirmation of LIBOR cessation dates, an “index cessation event” occurred (link), fixing the spread adjustment for USD LIBOR derivatives (note that this event also fixed the spread adjustment for other LIBOR currencies) and USD non-consumer cash products via the ARRC’s fallback language guidance. While this provides financial clarity to account for the fundamental differences between LIBOR and SOFR (e.g., secured vs. unsecured rates), value transfer cannot be fully mitigated given the differences between the five-year historical median and the spot spread (among other manners that value transfer can manifest).

Invesco has published a thought leadership article (Demystifying value transfer: A critical consideration in the transition away from LIBOR) on this topic. It is available via the “Insights” tab of Invesco’s LIBOR Transition external website.

Is there a timeline for adoption of SOFR?

Yes. The ARRC recommended best practices share recommended dates for completing the transition across floating-rate notes, business loans, consumer loans, securitizations, and derivatives. Note that the ARRC has stated there should be no new issuances of products referencing USD LIBOR after December 31, 2021.

How can I learn more about SOFR?

Additional resources can be found on the ARRC website, such as “A User’s Guide to SOFR” that details how to use SOFR in cash products.

What has the Commodity Futures Trading Commission’s (CFTC) Market Risk Advisory Committee (MRAC) done to increase SOFR adoption?

In conjunction with the ARRC, the MRAC has recommended (link), as a market best practice that interdealer brokers in key markets move from USD LIBOR to SOFR. For example, on July 26, 2021, the interdealer brokers changed the USD linear swap trading convention from USD LIBOR to SOFR.

The MRAC milestones have been critical in helping the market move away from USD LIBOR and adopt SOFR.

Does Invesco plan to leverage legislative solutions to remediate legacy LIBOR linked contracts, such as the US Federal LIBOR Legislation (ADJUSTABLE INTEREST RATE (LIBOR) ACT)?

Invesco welcomes the passage of the US Federal LIBOR Legislation as it provides a path away from USD LIBOR for contracts governed under US federal or US state law. This law provides the following benefits:

  • Establishment of a uniform process for replacing USD LIBOR (other than one-week or two-month USD LIBOR) for all contracts governed under US Federal or US State law that do not contain a workable and clearly defined replacement benchmark rate and that may not be able to be amended prior to June 30, 2023
  • Preclusion of litigation related to existing LIBOR contracts the terms of which do not provide for the use of a clearly defined or practicable replacement benchmark rate
  • Allowance of existing contracts that reference LIBOR but provide for the use of a clearly defined and practicable replacement rate to operate according to their terms
  • Addresses LIBOR references in certain Federal laws
  • Supersedes similar state laws that have been enacted in New York and Alabama and are in process elsewhere, creating a uniform, nationwide solution

As part of the investment team’s ISIN level review of their legacy USD LIBOR remediation plan, the applicability of a legislative solution is being reviewed in determining the ultimate approach. While Invesco supports a federal legislative solution, Invesco is also supportive of efforts by issuers and others to proactively remediate contracts.

What has the Alternative Reference Rate Committee (ARRC) done to assist the market with transitioning away from LIBOR for cash products?

The ARRC has conducted consultations for fallback language for various USD LIBOR based cash products and has proposed fallback waterfall rates and credit spread adjustment methodologies for fallbacks. The following products have had fallback language consultations to date: adjustable rate mortgages, bilateral business loans, floating rate notes, securitizations, syndicated loans, and variable rate private student loans. The ARRC has released final recommendations on fallback language that can be incorporated into USD LIBOR contracts for market use (note that adoption of ARRC proposed fallback language is voluntary). Beyond providing guidance on fallback language, the ARRC has worked to advocate for the passage of legislation to address those contracts without effective fallbacks that are written under various governing laws. The US Federal LIBOR legislation provides legal clarity for these contracts and is a significant industry milestone in remediating legacy USD LIBOR exposure.