NEW DELHI: Indian banks and financial institutions have been advised to use any widely accepted alternative reference rate (AAR) instead of the global benchmark for borrowings LIBOR (London Interbank Offered Rates) as the reference rate for entering into new financial contracts as soon as practicable and in any case by December 31, 2021.
The repetitive directive follows a decision of the Financial Conduct Authority (FCA), UK which on March 5, 2021, had announced that all LIBOR settings would either cease to be provided by any administrator or would no longer be representative after end-2021.
Since then, the market has been developing alternate ways, such as the use of risk-free reference rates that will replace the use of LIBOR. For instance, the Secured overnight financing rate (SOFR) is being widely used as a substitute for Libor in dollar-denominated loans and derivatives globally.
The global transition away from LIBOR is widely regarded as one of the biggest challenges faced in the financial industry. The central bank has urged banks and other financial institutions to incorporate robust fallback clauses, preferably well before the cessation date, in all financial contracts that reference Libor where the maturity is after the announced cessation date of the benchmark. Banks should also ensure that new contracts entered into before December 31 but mature after the cessation date include fallback clauses.