LIBOR discontinuation and alternative Risk Free Rates - FAQs
This information is meant to assist in updating you about the transition of key global benchmark interest rates, including LIBOR, and the impact on products that you may have with RBC Wealth Management International.
What is LIBOR?
The London Interbank Offered Rate (LIBOR) is historically the world’s most widely used interbank offered rate for short-term interest rates. LIBOR benchmarks are based on a daily quotation of rates by a number of leading banks regarding what it would cost the submitting bank to borrow unsecured funds from another bank. The administrator of LIBOR produces daily rates for five different currencies, being: USD, GBP, EUR, JPY and CHF, each of which are provided for various terms ranging from overnight lending to a twelve month term. LIBOR is published daily and referenced in a wide variety of contracts including loans and other credit products, bonds and derivatives.
What is changing?
In July 2014, the Financial Stability Board (the FSB) (an international body that monitors and makes recommendations intended to promote financial stability in the global financial system) issued a report expressing concerns about the reliability and robustness of existing interbank benchmark rates, including LIBOR. The recommendations in that report are now being implemented to address the FSB’s concerns, in particular, that the existing benchmarks were based on reported borrowing cost and were not grounded in actual transactions.
What is the financial conduct authority’s view?
The Financial Conduct Authority (the FCA) is the regulatory body in the UK tasked with ensuring that UK markets function well. This includes overseeing use of the LIBOR benchmark rate within the UK market. The FCA is tasked with consumer protection, protecting and enhancing the integrity of the UK financial system, and promoting effective competition in the interest of consumers.
The FCA, in line with the FSB recommendations and along with other regulatory authorities, is now requiring banks to move existing and new facilities away from LIBOR before the end of 2021 and transition towards the use of near risk free rates that are based on more active and liquid overnight lending markets instead of interbank offered rates, where appropriate.
What is RBC doing to prepare for the discontinuation of LIBOR and transition to RFRS?
Royal Bank of Canada is actively participating in industry-wide discussions and monitoring market responses regarding the transition away from IBORs, including LIBOR. RBC is collaborating with various working groups in the jurisdictions in which it operates to track the development of alternative (or reformed) nearly risk free reference rates and consider their implementation across a number of markets and products.
As a result, RBC Wealth Management International has reviewed its existing contracts and considered which alternative reference rates are most appropriate in view of the analysis it has undertaken of a range of possible replacement rates for LIBOR, including how those benchmark rates have fluctuated over a five year period. RBC Wealth Management have concluded that, for the credit products it offers, moving clients from sterling LIBOR to Bank of England base rate and from US LIBOR to the upper bound of the short-term interest rate target range set by the US Federal Open Market Committee and published by the Federal Reserve Bank of New York (“Fed Funds rate upper bound”) is the most appropriate replacement for those currency benchmarks considering the best interest of our clients.
For products provided under the Terms and Conditions for Banking Products and Services, the interest reference rate will move from LIBOR to a variable RBC Managed Rate. For more details please see Terms and conditions
What does the transition to an RFR mean to me?
The impact to you depends on what type of product you hold, the reference rate applicable to that product and the terms of that product.
RBC Wealth Management International will be in contact to inform you of which products you have with us that are impacted and to provide details of how we propose to amend your agreement with us. This will include confirmation of the rate that will be used as an alternative to LIBOR and the way in which that replacement rate will be applied. We are making every effort to ensure that you have adequate notice of the need for change.
Who should I contact for further information?
We will update this webpage with further information and updates from time to time. If you have any further questions in the meantime, please contact your Relationship Manager.