As part of its ongoing work to facilitate a smooth LIBOR transition for banks, the Mauritius Bankers Association (MBA) has published two sets of Frequently Asked Questions (FAQ) on the matter. Mr. Daniel Essoo, CEO of the MBA, tells us more about the rationale behind this.

What is LIBOR, and how does it fit into the banking industry?

LIBOR stands for London Interbank Offered Rate, which is the benchmark interest rate at which major global banks lend to one another. LIBOR was calculated based on submissions from a group of large banks, known as ‘’panel banks’’, using available market and transaction data-based expert judgment. It is currently produced for five currencies (the U.S. dollar, the euro, the British pound, the Japanese yen, and the Swiss franc) and seven tenors or time periods (Overnight/Spot Next, 1 Week, 1 Month, 2 Months, 3 Months, 6 Months, and 12 Months). It is often referenced in consumer loan-related products, derivatives, bonds, securitisations, and deposits, to calculate interest payments under those products.

Why is LIBOR being discontinued? How is the market adapting to the forthcoming changes?

Two main reasons have been singled out for the phasing out of the LIBOR. First, the underlying market that LIBOR has historically sought to measure – the market for unsecured wholesale term lending to banks - has not been an active market since the financial crisis; and secondly, the financial markets' over-reliance on LIBOR creates systemic risk.

In light of the scheduled phasing out immediately after 31 December 2021 for all British pound, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and immediately after 30 June 2023 in the case of the remaining US dollar settings, relevant authorities have released a series of alternative Risk-Free Rates (RFRs).

These are overnight interest rate benchmarks, which are perceived by the Financial Conduct Authority (FCA), and other regulators to be more representative and reliable than LIBOR. Regulators for the 5 LIBOR currency jurisdictions have published their preferred alternative reference rates, as illustrated in the FAQs brochures.

The MBA has published two sets of FAQs in a bid to facilitate LIBOR transition for banks. Tell us more about this initiative.

Further to the decision of the FCA to cease the LIBOR, the MBA set up a Working Group early this year to help its members with this complex issue, and ensure a smooth LIBOR transition by end of 2021. In order to achieve this smooth transition, it is important that a standard, clear message went out to inform clients of this process, and the implications for them. The two sets of FAQs have, therefore, been prepared in consultation with the MBA Legal sub-committee, and summarise the main key elements of information which clients should understand. These include technical elements such as the calculation of credit adjustment spreads, fall-back language for bilateral loan contracts, and harmonised timelines for implementation.

The long form FAQ is aimed at finance professionals and larger businesses, while the standard version targets the public, and small businesses. Member banks would also be uploading the set of FAQs on their individual websites, for clients’ information and benefit. The Bank of Mauritius has also issued an updated Guidance on LIBOR Transition, in light of the latest international developments. The objective is that Mauritian customers should receive clear, sound information without contradiction.

What is the main takeaway for customers as a result of the LIBOR transition?

There will be no more new loans based on LIBOR and existing facilities, including Letters of Credit (LCs), Import Loans, will need to be moved to more robust alternative rates.

Regarding existing contracts with a bank, this means that the interest rate contracts denominated in LIBOR would need to be amended and expressed in the new RFRs, particularly those that mature after the LIBOR cessation dates. Simply put, it means that the interest rate on their existing FX credit facilities will change.

While there may be temporary differences between credit sensitive LIBOR and the new RFRs, the latter will prevail after the LIBOR cessation dates. Customers are invited to contact their respective bank(s) at their earliest convenience, but well before the LIBOR end dates, to understand which contracts are affected and discuss revised terms with them - if you have not already been contacted. We recommend that customers do this now, rather than at the last minute, as banks expect a large volume of work closer to the deadline.