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Over the summer, the Reserve Bank of India (RBI) issued a notice to banks and other RBI-regulated entities, emphasising the need to speed up the transition away from LIBOR. The RBI notice states that banks and financial institutions should not enter into any new LIBOR-related contracts after 31 December 2021, as ICE Benchmark Administration Limited, the administrator responsible for LIBOR, is halting publication of its one-week and two-month U.S. dollar tenors on this date.
The notice also advises banks only to enter into LIBOR-linked contracts prior to the 31 December cut-off date if substantial fallback clauses are provided for in the contracts. This advice similarly applies to the use of contracts referencing the Mumbai Interbank Forward Offer Rate (MIFOR), which is itself linked to U.S. dollar LIBOR. Only in certain instances, for example in hedging transactions or when novating MIFOR contracts, will the use of MIFOR still be advised. The notice suggests that financial institutions comprehensively review all current direct and indirect exposures to LIBOR, informing clients of the existence of transitional arrangements, as well as the alternative rates that may be employed in the move away from LIBOR.
The notice therefore comes as a timely reminder to the markets that increasing focus should be directed at deciding on a suitable alternative reference rate (ARR) to employ in future agreements. This is a significant decision, not least because globally US$260 trillion in contracts is currently linked to LIBOR. In the context of India, the RBI estimated in its November 2020 bulletin that the country’s total exposure to LIBOR sat at $331 billion, as around 90 per cent of India’s current contracts refer to U.S. dollar LIBOR, whether via MIFOR regimes or otherwise.
Despite the RBI’s proposed cut-off date of 31 December 2021, the true deadline for a complete transition to contracts which reference U.S. dollar LIBOR in any capacity is not until 30 June 2023, until which time tenors other than one week and two month, such as one month, three month and six month will continue to be produced. Whilst this avoids an imminent disruption to the market and provides some breathing room for certain transactions, it does raise a question when entering into new facility agreements: should parties elect to put all faith in a designated ARR from the outset of the facility or, alternatively, adopt a wait and see approach by utilising a transitionary mechanism, whereby LIBOR applies for a specified term of the facility before essentially shifting to an ARR following a triggering event?
The messaging from the RBI is significant not only in its timing, but also in how it has been received by the market, with activity levels for LIBOR transition markedly increasing after the announcement. Whilst the first LIBOR replacement transactions at the start of this year showed the market that the issue was being considered, the RBI’s announcement has made banks focus on the need to get their houses in order quickly and develop a firm view on this critical issue. As regulator, the RBI can provide advice and make announcements, but ultimately it is down to the banks to take the next step on this journey to LIBOR transition.
If you are interested in learning more about Reed Smith’s India Business Team and how we can help you navigate the Indian marketplace, please visit our India page or contact Gautam Bhattacharyya, Sachin Kerur, Niket Rele or Nathan Menon. For further information on IBOR transition and related issues, please visit our IBOR page or contact Claude Brown.