On 27 February 2020, the Basel Committee on Banking Supervision published a newsletter concerning the benchmark rate reforms.
Key points in the newsletter include:
- as the London inter-bank offered rate (LIBOR) is not expected to exist past year-end 2021, market participants should consider carefully the economic, legal and reputational risks associated with continuing to write new contracts based on LIBOR;
- in cases where banks continue to use IBORs, the Basel Committee encourages them to include in their contracts robust fallback language that determines how the replacement of a discontinued reference rate would be handled;
- banks should also plan carefully to ensure that internally developed and vendor-provided systems and services that they use are fully prepared to accommodate the alternative reference rates;
- updating existing contracts to include fallback language, or directly adjusting contracts to reference a new benchmark rate, may trigger a reassessment of the instrument under prevailing accounting standards. Any revaluation or reclassification of assets or liabilities that result from such a reassessment of contracts could have various impacts on the financial statements of banks;
- regarding capital instruments, an amendment to their contractual terms could potentially trigger a reassessment of their eligibility as regulatory capital in some jurisdictions. A reassessment could result in an existing capital instrument being treated as a new instrument; and
- aside from contract changes, banks should consider what adjustments to their risk management frameworks will be necessary to take account of the transition to the alternative reference rates.