IBOR Transition Guide - AIB
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IBOR Transition Guide
CONTENTS What is changing? 1 How will IBOR transition affect customers? 2 What are IBORs and how are they used? 3 Why are benchmark rates important? 4 Transition from IBORs to alternative reference rates 5 What alternative reference rates will replace IBORs? 6 Recent guidance from regulators on GBP LIBOR 7 Key differences between LIBOR and SONIA 8 Key differences between IBORs and RFRs 9 How LIBOR is calculated 10 How SONIA will be calculated 11 How will interest be calculated using compounded SONIA? 12 Credit Adjustment Spread 15 How will the change to SONIA affect customer contracts? 16 Enhanced focus by regulators on the move away from LIBOR 17 What are we doing to get ready for the changes? 18 Frequently Asked Questions 19 Disclaimer 23
What is changing?
Banks use benchmark rates as the basis for calculating interest rates
for some products.
Interbank Offered Rates (IBORs) are the most commonly used
benchmark rates. IBORs are being reformed, and in many cases,
replaced. The London Interbank Offered Rate (LIBOR) is one of the
most widely used IBORs.
All banks are currently considering alternative rates to IBORs
generally, and LIBOR in particular.
Helping you transition
Helping You Prepare
This guide should help you prepare as we move towards
alternative benchmark rates.
Helping You Transition
We will support you to transition through this process
and we will continue to publish more information as it
becomes available.
IBOR Transition Guide, April 2021 1How will IBOR transition
affect customers?
Contracts which reference an IBOR may need to be reviewed
and amended.
AIB will review and respond to industry developments
and regulatory guidance as it evolves.
We will communicate with customers where changes to
products or documents are required.
In the meantime, you should review your documents carefully
as needed and seek independent advice (legal, financial, tax,
accounting or otherwise), from your own professional advisors,
based on your own particular circumstances.
2 IBOR Transition Guide, April 2021What are IBORs and
how are they used?
The London Interbank Offered Rate (LIBOR) and the
Euro Interbank Offered Rate (EURIBOR) are forms of
benchmark rates used, for example, in the calculation
of interest on some of our products.
How are they used?
IBORs are used in all kinds of financial transactions. For example, as the basis for calculating
certain interest rates when lending to individuals or corporate clients.
Banks and other organisations also use benchmark rates to value financial assets on their
balance sheet.
How were IBORs calculated in the past?
IBORs historically represented an average of the rates at which selected banks estimated they
could borrow money from other banks.
IBOR Transition Guide, April 2021 3Why are benchmark rates
important?
LOANS
They are the foundation on which
SECURITIES IBOR DERIVATIVES
many products are built
DEPOSITS
Benchmark rates, such as IBORs, are widely embedded in our economy, and
influence relatively simple products such as loans, overdrafts and deposits.
They are also used as the basis for more complex products such as securities
and derivatives.
Not all our products relate to IBORs and not every customer will be affected by
these changes.
They are widely used in our economy
Banks use IBORs to calculate interest rates when they are lending to individuals or
corporate clients.
IBORs are also used to monitor effects of monetary policy decisions, for example,
the European Central Bank and other Central Banks observe impacts of any
changes on market rates.
4 IBOR Transition Guide, April 2021Transition from IBORs
to alternative reference rates
As IBORs are key to the financial system, they have been subject to increasing regulation
and review.
Regulators and the banking market are seeking to reform IBORs and in some cases, to replace
them with Alternative Reference Rates (ARRs).
IBORs are based on forward looking estimates of how much it costs for a bank to borrow money
from other banks in the interbank lending market. The activity in this market has been declining
gradually. ARRs, such as Risk Free Rates (RFRs), are being introduced because they are based on
transactions which have already taken place in active markets, making them more accurate
and robust.
Changes are being made to benchmark rates
Banks and other financial providers are subject to the same guidance from regulators.
No new GBP LIBOR based cash products, such as loans, maturing after
31 December 2021, are to be entered into after 31 March 2021
Banks worldwide are working through what these changes mean for customers. The
implications for some products are likely to result in changes for customers
ARRs are alternative benchmark rates to IBORs. They include Risk Free Rates which are
overnight interest rates based on transactions which have already taken place
IBOR Transition Guide, April 2021 5What alternative reference
rates will replace IBORs?
Replacement Timeline What this means
GBP LIBOR*
Any new SONIA derived products
Product options based on will not be a precise like for like
customer needs and business Regulatory guidance sets an objective replacement for LIBOR derived
requirements, to potentially that no new LIBOR based cash products and are therefore not a
include SONIA (Sterling products are to be sold after direct substitute *. This will likely
Overnight Index Average). 31 March 2021. mean a change to contracts and
supporting systems.
* See table on page 9
USD LIBOR* Replacement Timeline What this means
Transition to Replacements must be in place by As with SONIA, products which need
Secured Overnight 31 Dec 2021. to be changed may well require new
Financing Rate (SOFR). contracts and supporting systems.
EURIBOR Replacement Timeline What this means
Reforms have been made to how
No requirement to transfer to a new
EURIBOR is calculated and it Updates on this will follow as the
rate, but future of EURIBOR unclear.
remains compliant with European market evolves.
Benchmarks Regulation.
*There are also LIBOR rates in other currencies
6 IBOR Transition Guide, April 2021Recent guidance from
regulators on GBP LIBOR
At the end of April 2020, the Working Group on Sterling Risk-Free Rates, the
Bank of England and the Financial Conduct Authority published guidance which included
updated objectives to reflect the impact of Covid-19 on the banking sector:
By the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked
products to their customers
After the end of Q3 2020, lenders, working with their borrowers, should include clear
contractual arrangements in all new and re-financed LIBOR-referencing loan products
to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an
agreed process for renegotiation, to SONIA or other alternatives
No new GBP LIBOR based cash products, such as loans, maturing after 31 December
2021, are to be entered into after 31 March 2021
This builds on previous guidance which stated that new Alternative Reference Rates for
IBORs should be in place by 31 December 2021, when banks will no longer be
compelled to submit quotes for LIBOR
How will this guidance affect customers?
We are working towards meeting the objectives set by regulators which means that our intention is that
AIB will no longer actively be selling products based on the LIBOR benchmark after 30 September 2020
All contracts on GBP LIBOR entered into after 30 September 2020 and expiring after the end of 2021,
will have clear contractual arrangements to facilitate conversion to SONIA or an alternative rate
The new products will not be on a precise "like for like" basis with those currently in place. See page 9
for more information
Existing contracts which relate to an IBOR may need to be reviewed or amended depending on final
maturity date
We will communicate with customers where changes to products or documents are required
IBOR Transition Guide, April 2021 7Key differences between
LIBOR and SONIA
As directed by the FCA and other global regulators, GBP LIBOR will cease to exist between
now and the end of 2021. Our intention is that we will no longer actively be selling products
based on the LIBOR benchmark after 30 September 2020.
Key differences between LIBOR and SONIA
LIBOR has become increasingly based on forward looking estimates whereas SONIA is a backward looking rate
based on actual transactions.
LIBOR is published at the start of a particular interest period based on the estimated cost of interbank funding
for that interest period, whereas SONIA is published daily in respect of transactions that have completed over
the previous night.
Previously, in advance of booking or drawing down a loan in LIBOR, we were able to provide customers with
an indicative rate. Subsequently, following booking /drawdown, we gave customers the actual interest rate. We
will not be able to provide an indicative rate for SONIA, however customers can view the SONIA pricing and
trends (albeit five days in arrears) from the Bank Of England’s published index.
LIBOR is available in tenors such as 1,3 or 6 months, whereas SONIA is a pure overnight rate and therefore to
achieve a rate for a similar period, interest is compounded in arrears over that timeframe to produce
compounded SONIA.
LIBOR is calculated using simple interest, whereas SONIA is calculated using compound interest.
How does the change affect customers?
The two benchmark rates are calculated differently. The Bank of England will publish a compounded SONIA
index to minimise the impact to customers, but the rates are not “like for like”.
The Bank of England will publish daily SONIA rates and also a compounded SONIA index and these
publications will provide transparency for customers on interest rate costs and trends.
As SONIA is compounded daily in arrears over the interest period, pre-notification of the interest rate at the
start of the interest period is not possible.
Customers who need comfort on what to expect should refer to the index of compounded SONIA rates
published by the Bank of England.
We will calculate the interest payable on a loan using the compounded SONIA index, five days before the
ending of the relevant interest period and we will notify customers of the interest payable a number of days in
advance of the loan maturity or rollover.
The calculation of the compounded SONIA index is a very transparent
mechanism overseen and administered by the Bank of England.
8 IBOR Transition Guide, April 2021Key differences between
IBORs and RFRs
IBORs such as LIBOR RFRs such as SONIA
Based on estimates Based on actual transactions
Term rates published for 7 tenors (e.g. 1, 3, 6 months) Overnight rates only
Forward looking Backward looking
Published in advance Determined closer to the end of the interest reference period
Higher rate generally and include a premium paid on longer Lower rate generally as they do not include a premium for term
dated funds
Include term bank credit risk Near risk free
For GBP loans, the risk free rate replacing LIBOR is SONIA. From 1 October 2020, we will offer a new product
to facilitate market transition from LIBOR to SONIA. This new product will be used for:
new GBP loans based on a market related rate and issued from 1 October 2020 onwards; and
existing LIBOR based loans converting to SONIA by the regulatory deadline of 31st December 2021
The difference between LIBOR and SONIA is the way in which the benchmark rates are calculated. LIBOR is
a forward looking interest rate with a number of different tenors published daily (e.g. overnight, 1 week,
1/3/6/9 months), and is based on an average interest-rate calculated from submissions from a panel of banks
in the Wholesale Market.
SONIA is an overnight, backward looking risk free rate and is based on actual transaction data. It reflects the
average cost that banks pay to borrow sterling overnight from the Bank of England. The SONIA rate will be
compounded over an observation period which will be calculated from day minus five (five working days
prior to the first day of the interest period) to five days before the end of the interest period.
In practice, this means that customers won’t know the interest rate applicable to their loan until close to the
end of the interest period. Customers can monitor SONIA rates throughout the calculation period on the
Bank of England website which will help them to judge what a likely interest rate will be.
Term structures, (e.g. 3 or 6 months) which were widely available for the various IBORs, are not currently
available, but may be developed in the future. The Bank of England Risk Free Rate Working group are
reviewing options for term rates.
Customers who are looking for certainty around cash flows and repayment amounts, may find that a loan
with a fixed repayment schedule or a fixed rate loan may be more appropriate for their needs, subject to
credit approval.
IBOR Transition Guide, April 2021 9How LIBOR is calculated
LIBOR is primarily based on forward looking estimates of rates available at different tenors.
LIBOR offers tenors from overnight to 12 months, with variants in between. LIBOR is a
publicly available rate.
As the LIBOR rate is forward looking, it is known at the outset of the interest period, and all
of the elements of the “all-in” customer rate, remain static for the interest rate period. As a
result, the components of the interest rate, together with the amount of interest can be
calculated using the formula below and advised to customers at the start of any lending
period. This is current market practice.
LIBOR is calculated as follows: P x T x R :
P = Principal (Nominal amount of the loan)
T = Time (Number of days in the interest period)
R = Rate (the all-in rate applicable to the interest
rate period which includes any margin)
For example
If you borrow £1m for a period of 90 days based on LIBOR, you would know at the start of the loan that the cost
of the interest for the period would be: £1m X 90 days X (LIBOR plus margin)
Day 1 See illustration below for a 90 day loan Day 90
Interest period begins Interest period ends
Customer pays interest
10 IBOR Transition Guide, April 2021How SONIA will be calculated
As SONIA is compounded daily in arrears over the interest period, pre-notification of the interest rate at the
start of the interest period is not possible. It changes on a daily basis during the interest period of the loan.
This is the key difference between LIBOR and SONIA.
Previously, in advance of booking or drawing down a loan in LIBOR, AIB were able to provide customers with
an indicative rate. Subsequently, following booking /drawdown, we advised customers of the actual interest
rate. We will not be able to provide an indicative rate for SONIA , however, customers can view the SONIA
pricing and trends (albeit 5 days in arrears) from the Bank Of England’s published index.
In order to help customers to better understand and manage their loan, SONIA will be calculated on an
observation period basis. This means that the interest rate will be calculated from day -5 ( 5 working days prior
to the first day of the interest period) to day 85 for a 90 day interest period, rather than from day 1 to day 90 of
the 90 day interest period. This means that customers will know the amount they need to pay approximately 5
days before the end of the interest period. This will not affect the date that interest will be charged to your
account. Whilst the example below is for a 90 day interest period, the same principles will be used for all other
loan tenors.
See illustration below for a 90 day loan with and without observation period
Day 1 Day 90
Interest period begins Interest period ends. No clarity on
what customer must pay
Without observation period
Day -5 Day 1 Day 85 Day 90
Calculation starts
Interest period begins Calculation ends Interest can be paid
With observation period
IBOR Transition Guide, April 2021 11How will interest be
calculated using
compounded SONIA?
Using the Compounded SONIA Rate, the formula to calculate SONIA interest will be P x T x R where;
P = Principal (Nominal amount of the loan)
T = Time (Number of days in the interest period)
R = Rate (the “all-in” rate applicable to the interest rate period using the Compounded SONIA Rate, plus a Credit
Adjustment spread, plus the margin)
To assist in calculating the R, the Bank of England have supplied the following formula
The formula to calculate the Compounded SONIA Rate is as follows:
SONIA Compounded Index Y 365
Compounded SONIA rate between x and y = -1 X
SONIA Compounded Index x d
Where
y = end date of the applicable reference period being the final day of the interest period or, if different, the date
up to which interest is to accrue (most recent index value)
x = start date of the applicable reference period being the first day of the interest period (initial index value)
d = the number of calendar days in the applicable reference period being the Observation Period
12 IBOR Transition Guide, April 2021The Bank applies a lookback period with observation shift methodology when using the Bank of
England’s formula for calculating the Compounded SONIA Rate. This means that the applicable
SONIA rate for each day during an interest period is weighted against the number of days in the
Observation Period (as defined below).
In order for the Compounded SONIA Rate to be determined five Business Days before the end of the
interest period, the applicable SONIA Compounded Index value for the start date of the interest
period (the “x” date referred to in the formula above) will be the SONIA Compounded Index value
published five Banking Days prior to “x” date and the SONIA Compounded Index value for the end
date of the interest period (the “y” date referred to in the formula above) will be the SONIA
Compounded Index value published five Banking Days prior to “y” date. In respect of any Saturday,
Sunday and/or bank holiday which falls during the Observation Period, the SONIA Compounded
Index value applicable for that day shall be the SONIA Compounded Index value fixed on the
preceding Banking Day.
For the purposes of this Guide:
"Banking Day" means a day (other than a Saturday or Sunday) on which banks are open for general
business in London.
"Observation Period" means, in relation to an interest period, the period from and including the date
that is 5 Banking Days prior to the first day of the relevant interest period and ending on but
excluding the date that is 5 Banking Days prior to the last day of that interest period.
"SONIA" means the sterling overnight index average.
"SONIA Compounded Index" means in relation to any day in an interest period, the relevant SONIA
Compounded Index value published on the SONIA Compounded Index value date applicable for
that day by the Bank of England on its database website.
IBOR Transition Guide, April 2021 13How is the interest calculated?
At the end of each interest period the Compounded SONIA Rate for that interest period is determined as
described above. The Compounded SONIA Rate is added to the Credit Adjustment Spread and the Margin that
has been agreed between the Borrower and the Bank. This "all in interest rate" is then used to calculate the
interest due for the interest period using the following formula
days in period
Interest due for the period = principal outstanding x all-in interest rate x
365
Interest Rate Floor
In the event that the Compounded SONIA Rate is a negative amount, an equivalent interest rate floor to the
floor which applies to your current Sterling LIBOR loan will apply in respect of the interest rate. An interest rate
floor is a rate below which the relevant component(s) of the interest rate calculation cannot fall.
Replacement formula
The Bank may, from time to time, amend or replace the formula for the calculation of the Compounded SONIA
Rate or any constituent part thereof provided that any amendment to or replacement of the formula which is
selected by the Bank (acting reasonably) must fulfil the conditions set out in the definition of “Compounded
SONIA Rate”. The Bank shall promptly notify the Borrower in writing of any amendment to or replacement of
such formula.
For the avoidance of doubt, the notification requirement referred to in the preceding paragraph will apply to
any amendment or replacement of the formula for the calculation of the Compounded SONIA Rate or any
constitu-ent part thereof which would result in the Compounded SONIA Rate or any constituent part thereof
being calculated and then floored on a daily basis.
14 IBOR Transition Guide, April 2021Credit Adjustment Spread
What is a Credit Adjustment Spread?
It is a measure of bank credit risk and term liquidity premium because SONIA is, by definition, a near Risk Free
Rate. These elements were already built into LIBOR rates. AIB’s funding profile and cost of funds from wholesale
markets will not change in this new environment, therefore, the Credit Adjustment Spread is included in the
“all-in” rate to ensure bank credit risk and the term liquidity premium is still taken into account.
Credit Adjustment Spread means, in respect of an interest period, the credit adjustment spread value which is
the percentage rate per annum applicable to that interest period as determined by the Bank at the start of that
interest period using either:
(a) the median of the differences between Sterling LIBOR for the relevant interest period tenor and SONIA
compounded over the corresponding period, fixed in line with the recommendations of the International Swaps
and Derivatives Association and as published as a fixed value alongside the corresponding interest period tenor
on the Bank's website at the following address: aib.ie/fxcentre/cas (the "Website"); or
(b) such other index or methodology as may be notified to the Borrower in writing from time to time provided
that any replacement index or methodology selected by the Bank (acting reasonably) and notified to the
Borrower shall be an index or a methodology which is:
(i) formally designated, nominated or recommended by any relevant administrator or relevant nominating body;
or
(ii) in the opinion of the Bank, generally accepted in the international or any relevant domestic loan markets as
an appropriate index or methodology for the calculation of the Credit Adjustment Spread.
For the avoidance of doubt, the Credit Adjustment Spread (as defined above) is intended to be a measure of
bank credit risk and term liquidity premium.
What is the margin?
The margin is the price charged by AIB to the borrower for providing the loan.
You can find out more about SONIA on the Bank of England website, which also features an
Interactive Statistical Database of historical data
https://www.bankofengland.co.uk/markets/sonia-benchmark
IBOR Transition Guide, April 2021 15How will the change to SONIA
affect customer contracts?
In previous versions of this guide, we have advised that we will communicate with
customers where changes to products or documents are required.
The necessary updates required to any customer contracts which reference GBP LIBOR will
commence from October 2020 and continue during 2021. The table below outlines the
various scenarios. If you are affected by these changes, your Relationship Manager will be
in touch to discuss what this means for you.
Scenario Outcome
Existing contracts redeemed in full by 31
No action needed
December 2021
Existing contract which expires after
Contract to be amended
31 December 2021
New contracts agreed before 30 September 2020
No action needed
and fully redeemed by 31 December 2021
For new LIBOR and SONIA contracts, we may need to make further changes to contracts as the
financial markets and the Bank of England establish market conventions in relation to SONIA
16 IBOR Transition Guide, April 2021Enhanced focus by regulators on the
move away from LIBOR
2020
RFR Working Group issues updated priorities
and objectives (Jan 2020)
The default basis for all new GBP interest rate
swaps from 2 March 2020 should be based on
SONIA (the new risk free rate)
By the end of Q3 2020, lenders should be
in a position to offer non-LIBOR linked
products to their customers
After the end of Q3 2020, lenders, working with their
borrowers, should include clear contractual
arrangements in all new and re-financed
LIBOR-referencing loan products to facilitate
conversion ahead of end-2021, through pre-agreed
conversion terms or an agreed process for
renegotiation, to SONIA or other alternatives
2021
Bank of England objective to establish a clear
framework to manage transition of legacy LIBOR
products, to significantly reduce the stock of GBP
LIBOR referencing contracts by Q1 2021
No new GBP LIBOR based cash products, such
as loans, maturing after 31 December 2021, are
to be entered into after 31 March 2021
31 Dec 2021
Transition period expected to end
RFRs in place for GBP and USD
Banks no longer compelled to submit LIBOR
IBOR Transition Guide, April 2021 17What are we doing to get
ready for the changes?
As we move through the phases of IBOR transition, we
will monitor and respond to how the industry evolves
and regulatory guidance is provided, to help
customers with a smooth and effective transition.
1
Investigate & Prepare
Review industry developments and contribute to
industry debate to support measures which we
consider to be appropriate. Prepare robust plans for
the transition.
2
Keep Customers Updated
Share updates and guidance on a regular
basis. We will be updating
www.aib.ie/ibortransition
3 If your products or documents need to change,
we will communicate with you.
4 Backing Our Customers
Support customers as they adjust to the changes.
18 IBOR Transition Guide, April 2021Frequently Asked
Questions (FAQ)
What is a Benchmark Rate?
Benchmark Rates are used in financial transactions throughout our economy, for
example, to calculate interest rates for loans.
What are IBORs?
Interbank Offered Rates represent an estimate of how much it would cost a bank to
borrow money from other banks. IBORs are published in several currencies and for a
variety of interest periods.
What is LIBOR?
The London Interbank Offered Rate. This is calculated from estimates submitted by a
selection of banks in London.
What are Alternative Reference Rates (ARRs)?
They are benchmark rates which are being developed as an alternative to IBORs.
Why are IBORs being replaced?
IBORs are based on forward looking estimates of how much it costs for a bank to borrow
money from other banks in the interbank lending market. The activity in this market has
been declining gradually. ARRs, such as Risk Free Rates, are being introduced because they
are based on transactions which have already taken place in markets which are very active,
making them more accurate and robust.
What are Risk Free Rates?
Risk Free Rates are a type of ARR. They are overnight rates, based on transactions which
have already taken place.
How are Risk Free Rates different to IBORs?
Risk Free Rates are based on information from transactions which have already taken place.
They will therefore be less reliant on the judgement of banks, and therefore called "Risk Free".
When do the changes to IBORs come into effect?
ARRs for LIBOR need to be in place by 31 December 2021. A timeline for having ARRs for
EURIBOR is unclear at this time.
What is SONIA?
The Sterling Overnight Index Average which is the new Risk Free Rate for
Sterling transactions.
What is SOFR?
The Secured Overnight Financing Rate which is the new Risk Free Rate for
US Dollar transactions.
IBOR Transition Guide, April 2021 19Frequently Asked
Questions (FAQ)
What is €STR?
The Euro Short Term Rate which is a new Risk Free Rate for Euro transactions.
What is EURIBOR and how is it changing?
The Euro Interbank Offered Rate. EURIBOR has been reformed to meet the
requirements of the EU Benchmarks Regulation, to include in its calculation, information
based on transactions that have already taken place. €STR may replace EURIBOR in the
future, however it is likely that in the short term, banks will continue to use EURIBOR.
Are all Banks impacted?
All banks which offer products based on IBOR rates are impacted.
What are we doing to get ready for this change?
We are monitoring this situation and will provide customers with further information as
things progress and share updates and guidance on a regular basis.
What does this mean for me?
If you have a contract with us that relates to an IBOR, this might need to be amended at
some stage in the future. If this is the case, we will communicate with you.
What if I am unsure about these changes?
Should you wish to discuss the impact of IBOR transition on any of the products you hold
with us, please contact us as outlined below.
If you are in any doubt as to the impact of these reforms, you are encouraged to seek
independent advice (legal, financial, tax, accounting or otherwise), from your own
professional advisors, based on your own particular circumstances.
What are the next steps?
Whether you are taking out a new product, or you are an existing customer, we are making
you aware that IBOR transition will require us to make changes to products and
documents. In either case, whether you are taking out a new product, or you are a new
customer, if you are affected by these changes we will communicate with you.
20 IBOR Transition Guide, April 2021Frequently Asked
Questions (FAQ)
New FAQs for March 2020
How is IBOR transition being guided by regulators?
In 2017, the Financial Conduct Authority (FCA) announced that they would no longer compel
panel banks to submit quotes for LIBOR beyond the end of 2021. Since this announcement the
FCA have provided guidance to banks to assist them with the transition from IBORs to ARRs.
The FCA has been assisted in this task by the Bank of England (BoE) and the working group on
Sterling Risk Free Rates (RFRWG), which is a subset of the BoE.
The purpose of the transition to ARRs is to more accurately reflect the current interbank market
activities. As a consequence, several industry bodies and private and public sector working
groups have been established in various countries to choose suitable ARRs and to provide
guidance to banks to help them with the transition.
Does this change only affect GBP LIBOR products?
No. While GBP LIBOR, which seeks to measure lending in sterling on the London
interbank market, is a widely recognised benchmark rate, IBORs are available to measure
interbank lending in lots of other currencies, for example US Dollar.
What are regulators advising banks in order to assist IBOR transition?
In November 2019, the Risk Free Rates Working Group (RFRWG) set an objective for banks
and other financial providers that no new GBP LIBOR based cash products, such as loans,
maturing after 31 December 2021, are to be entered into after 30 September 2020. In April
2020, in light of the impact of Covid 19, this has been extended to 31 March 2021.
This means that from this date, it is unlikely that banks will be able to offer customers LIBOR
as an interest rate on their loans. The FCA and the BoE both fully support this
recommendation from the RFRWG.
What is AIB doing based on the new Bank of England guidance?
We will work towards meeting the objectives set by regulators. We are also working on a
strategy so we can offer a new product based on ARRs.
What options are being proposed for new products and when will they be in place?
We are currently working on both a new product strategy, and a plan to transition existing
customers with contracts linked to LIBOR to ARRs, such as an RFR. We will provide an
update once a path has been clearly established.
How will my IBOR contract be changed to one which incorporates an RFR?
This will depend on the kind of product you hold with us and the terms of your contract.
You should review your documents carefully and seek independent advice (legal, financial,
tax, accounting or otherwise), from your own professional advisors, based on your own
particular circumstances. The amendment process may be different for each product type.
If you are affected we will contact you.
IBOR Transition Guide, April 2021 21Frequently Asked
Questions (FAQ)
New FAQs for September 2020
What will the outcome be for transition away from LIBOR?
The Bank of England have stated that steps should be taken to ensure customers have been
treated fairly when replacing LIBOR. This means that LIBOR discontinuation should not be
used to move customers with continuing contracts to replacement rates that are expected to
be higher than what LIBOR would have been, or otherwise introduce inferior terms.
The regulator also states that firms receiving LIBOR-linked interest are not expected to give
up the difference between LIBOR and SONIA. Both of these factors must be considered as
part of the move to SONIA.
Will there be any changes to the terms of my current documentation?
Depending on the expiry date of your current documentation, we may need to make a
change to bring it into line with the new SONIA benchmark. If you are affected your
Relationship Manager will be in touch over the coming months.
Who will bear the cost of repapering legal documentation?
As its possible that both AIB and its customers are likely to incur legal costs, these will be
paid by each individual party.
How do I know if these changes will affect me?
These changes affect customers with products that reference LIBOR. If changes to
documentation are required, your Relationship Manager will be in touch.
What options are available for customers who are transitioning away from LIBOR?
The default option will be SONIA, but there will also be an option for a fixed rate in some
cases, subject to AIB internal approval. If you are in any doubt as to the impact of these
reforms, you are encouraged to seek independent advice (legal, financial, tax, accounting
or otherwise), from your own professional advisors, based on your own particular
circumstances. The rate options available to each customer will be on a case by case basis.
Each customer will have their products reviewed by the Relationship Manager, and they
will be in touch to discuss this with you.
Will the new calculation affect my interest payment date?
No, this will remain as previously agreed.
Where can I go for more information?
IBOR.QUERY@aib.ie or your Relationship Manager
In addition the following websites may be useful:
UK
https://www.bankofengland.co.uk/
Europe
https://www.ecb.europa.eu/home/html/index.en.html
22 IBOR Transition Guide, April 2021Disclaimer This guide is provided for information only and may not represent the views or opinions of Allied Irish Banks, p.l.c. or its affiliates (collectively, AIB), employees or officers. The information contained in this guide does not constitute and shall not be construed to constitute legal, tax and/or accounting advice by AIB. AIB makes no representation as to the accuracy, completeness, suitability or timeliness of such information, which may also be subject to change. This guide may only be accessed by recipients lawfully entitled to do so. This guide and any documents provided with it should not be used or relied upon by any person/entity (i) for the purpose of making investment or regulatory decisions, (ii) to provide regulatory advice to another person/entity based on matter(s) discussed herein or (iii) in connection with any transaction, contract or communication. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This guide is not a commitment or firm offer and does not oblige us to enter into such a commitment, nor are we acting as a fiduciary to you. Any transaction which you may enter into with AIB will be on the basis that you have made your own independent evaluations, without reliance on AIB, and based on your own knowledge and experience and any professional advice which you may have sought in relation to all aspects of the transaction including, without limitation, legal, accounting and/or tax advice. Recipients of this guide should be aware of statements made by the Financial Conduct Authority and other international regulators, that LIBOR will cease to be published between now and the end of 2021. We encourage you to understand how the provisions of your product(s) with AIB and any linked products will operate should LIBOR or other applicable benchmarks be discontinued, have their use restricted, if any published benchmark rate ceases to be in customary market usage, or if there are changes to the way in which the benchmark is calculated, and bear in mind that amendments to your contract and any contract for linked products may be required in the future. AIB cannot give any assurances that LIBOR or any other benchmarks will continue to be published or give any assurances as to the likely impact (including on the value, price or performance of your product), costs or expenses associated with any resulting transition. If you are in any doubt as to the impact of these reforms, you are encouraged to seek independent advice (legal, financial, tax, accounting or otherwise), from your own professional advisors, based on your own particular circumstances. In no event will AIB be liable to you or any third party for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising whether in contract, tort (including negligence), breach of statutory duty, or otherwise, arising out of, or in connection with, your use of (or failure to use) any information provided in this document. We encourage you to keep up to date with the latest regulatory and industry developments in relation to IBOR transition and to consider its impact on your business. You should consider, and continue to keep under review, the potential impact of IBOR transition on any existing product you have with AIB, any new product you enter into with AIB, and any other products you hold. Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Regulated No. 24173 IBOR Transition Guide, April 2021 23
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