The LIBOR transition
For BBVA, it’s important that our clients, counterparties, investors and other stakeholders understand what financial benchmark rate reform is and what it means for them, BBVA and financial markets more broadly.
Financial benchmark rate reform impacts short-term interest rates commonly used across financial markets, also known as London Interbank Offered Rates (LIBOR).
What is LIBOR?
LIBOR is the most widely used interest rate benchmark in financial markets, estimated to be referenced in over $200 trillion of financial products, including bonds, derivatives and loans.
Why is LIBOR reform taking place?
Over time, changes in interbank funding markets have meant that LIBOR was based less on observable transactions and more on expert judgment.
Financial markets regulatory authorities reviewed what these changes meant for financial stability, and in 2013 published recommendations to reform major interest rate benchmarks. These recommendations included best practice principles for financial benchmarks, measures to strengthen existing benchmarks and plans to develop alternative reference rates.
As a result of these recommendations, LIBOR is being replaced with an alternative reference rate.
What does the replacement of LIBOR entail?
The replacement of LIBOR is a significant undertaking for financial markets participants. LIBOR is being phased out and replaced by Secured Overnight Funding Rate (SOFR).
The expectation is that publication of LIBOR may cease at the end of 2021 and that all institutions should end their reliance on LIBOR by that time.
As we prepare for this change, regulators and financial markets participants are taking action to ensure the adoption of SOFR takes place with minimal disruption and risk to clients, counterparties, investors and other stakeholders.
Why is the LIBOR replacement important for clients, counterparties, investors and other stakeholders?
While LIBOR publication may cease at the end of 2021, it is important for clients, counterparties, investors and other stakeholders to develop an understanding of what the transition from LIBOR to SOFR means now.
As the industry considers how and when it will transfer to SOFR, it is important to note that the timing of changes may vary. As a result, early action, to prepare and understand LIBOR exposure, is recommended by regulators for financial markets participants.
What can you do to prepare?
BBVA is preparing for the LIBOR transition and we encourage our clients, counterparties, investors and other stakeholders to do so as well.
As a client or counterparty of BBVA, it is important that you are aware of what the change from LIBORto SOFR might mean for you, including whether you require guidance or support from professional advisers.
Preparation may include, understanding:
your exposures to LIBOR and how existing transactions may behave if reliance on LIBOR is phased out or LIBOR publication ceases, including the risks involved in continuing to use LIBOR in new transactions
actions required to ensure your readiness and limit any impacts and risks of the LIBOR transition
the differences between LIBOR references today and the proposed SOFR replacement
other impacts that the transition from LIBOR to SOFR may have on your business
The financial services sector continues to work through certain aspects of the LIBOR transition and the functioning of new markets and products. National working groups and key regulators are leading efforts to resolve or provide clarity on the outstanding issues. Our stakeholders can follow industry developments between now and the end of 2021 by staying connected with BBVA, and directly through the website links provided below.
Beyond LIBOR, you might also seek to understand the potential impacts and risks relating to other rates that may be subject to reform, including BBSW, EURIBOR and TIBOR rates.
What does the change mean for BBVA?
As a diversified financial group, with a variety of global products and services, the transition from LIBOR to SOFR is an important change for us.
To ensure we are well prepared, we are conducting a detailed analysis of our use of LIBOR rates. This includes a review of LIBOR references within legal agreements, systems, models and processes. We are developing plans to manage the related impacts and risks of transition, including how we meet the needs of our clients as SOFR usage increases and where direct engagement on existing transactions, agreements and arrangements might be required.
For more information, please get in touch with your usual BBVA contact.
As further details of the transition arrangements emerge, we will update stakeholder-facing staﬀ with guidance.
For enquiries at the BBVA Group or BBVA Aﬃliates level, or for regulatory or sectoral input, please contact our Global IBOR Transition Team: IBOR@BBVA.com
For information on market developments please see the following external sources:
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