IBOR transition: multi-currency issues from Asian perspective 

Introduction

On 31 March 2021, the Singapore Steering Committee for SOR & SIBOR Transition to SORA (SC-STS) announced new industry timelines to cease issuance of SOR derivatives and SIBOR-linked financial products by the end of September 2021.

These new milestones are intended to complement the existing timelines for cessation of SOR cash market products by the end of April 2021 and to substantially reduce gross exposure to SOR derivatives by the end of September 2021. Please see our updated pictorial timeline reflecting these milestones.

In Asia, the general approach when adopting loan products linked to risk free rates (RFR) is to follow (or at least start from) the conventions set out in the Asia Pacific Loan Market Association (APLMA) rate switch and compounded SOFR USD discussion drafts published on 23 December 2020 (and updated on 1 January 2021).

The challenge is that the working groups in different jurisdictions have also published recommended conventions for RFRs for the relevant currency in their jurisdiction.

These recommended conventions are similar in many respects, but do contain certain variances. These variances are more problematic in the context of a multi-currency transaction.

Practitioners have to decide for example for a multi-currency loan whether to adopt the recommended conventions published by one working group or industry committee and use them for all currencies (which appears to be the preferred choice/approach) or adopt the relevant recommended conventions for each currency, which may lead to slightly different computations between each currency.

In this briefing, we focus on the variances in the conventions published by the working groups / trade association responsible for the US dollar, the Sterling and the Singapore dollar RFR benchmarks.

Latest recommended conventions

This is a table which sets out the latest recommended conventions published by the working groups or industry committees which are most relevant to the loan market in Asia (in particular in Singapore).

Comparison of recommended conventions

We set out below a comparison between the recommended conventions.

Implications

The reasons for recommending certain conventions are explained in the papers published by the respective working groups. We highlight below answers to commonly asked questions we have received recently:

• whether to use observation shift: in deciding this, it should be noted that while observation shift is compatible with the use of certain RFR indices and allows closer alignment with certain derivative hedges, it may be more difficult to operationalise and could result in too much or too little interest in the event of early prepayment or loan trading; and
• whether to implement a cumulative or non-cumulative approach: in considering this, parties should note that, as highlighted in the Sterling RFRWG papers, if the same rounding convention is adopted, the resultant interest amount should be the same. While non-cumulative approach better supports intra-interest period events such as prepayment and secondary trading, technical solutions exist to calculate interest using cumulative approach in these situations.

Timing for benchmark replacement or switch

In the FAQs on ceasing new SOR-linked loans after April 2021, the SC-STS indicated that draw down under legacy SOR facilities would be allowed after 1 May 2021, although active transition and inclusion of adequate fallback should be made latest by the end of 2022.

Given the different timing for cessation of benchmarks (see our previous briefing on announced LIBOR cessation dates) and, for Singapore dollar, the different cessation dates for SOR (which are dependent on the cessation dates for US dollar LIBOR) and SIBOR (which have been separately announced by the SC-STS), parties in multicurrency transactions may have to consider the timing for benchmark replacement or switch for different currencies.

As explained in our previous briefing on trigger events, the ARRC's recommendations of fallback language for business loans (which were recently supplemented in March 2021) only replace a benchmark when all available tenors have ceased or become no longer representative.

This will allow parties to continue to use the (remaining tenors of the) forward-looking term rates they are familiar with and may be preferable where the other currencies in the same transaction also adopt such rate (e.g. HIBOR for Hong Kong dollar loans).

Alternatively, an early trigger approach is to agree to the rate switch when any customarily displayed tenor of the applicable rate ceases to be published or becomes no longer representative (likely to happen on 31 December 2021 for LIBOR) as provided in the APLMA discussion drafts.

This early trigger approach may be more in line with the guidance of most regulators to actively transition to RFRs as soon as practicable, particularly in view of the likely decline in liquidity of RFR products going forward.

Conclusion

Given the different recommendations outlined above and the staggered cessation dates of certain interbank rates, it may be challenging to come up with a consistent and standardised approached for referencing and transitioning to alternative benchmarks in multicurrency transactions.

Therefore please do focus on these issues early so that you or your organisation do not trip up when you transition or are required to transition to RFR products.

Please feel free to get in touch with the team below or your usual Ashurst contact to find out more about the approaches being adopted in the market.

Thank you to Susana Chan for her assistance in preparing this article.