LIBOR Transition

Dear Valued Client,

We, Doha Bank (the ‘Bank’ and/ or ‘the Bank’) wish to inform you and / or as you may already be aware, the London Interbank Offered Rate (LIBOR), considered one of the most important interest rates benchmarks in finance, is scheduled to be phased out during the period post 31 December 2021 to 30 June 2023, for most tenors and currencies. The industry players are taking steps to prepare for the coming change. The Alternative Reference Rates Committee (ARRC), which was convened by the Federal Reserve Board and the New York Federal Reserve, defined the Secured Overnight Financing Rate (SOFR) as an alternative rate for USD LIBOR.

Below are the recommended currency and tenor specific cessation dates for the LIBOR transition as recommended and accepted by the regulators, relevant for the Bank:

  • 31st December 2021, for the 1 week and 2 months USD LIBOR settings; and
  • 30th June 2023 in the case of the remaining USD LIBOR settings (Overnight, 1 month, 3 months, 6 months, and 12 months).

Major central banks and regulators have decided to transition from the existing Interbank Offered Rates (IBORs) to alternative Risk-Free Rates (RFRs), also referred to as Alternative Reference Rates (ARRs). Please note that there is broad support by regulators and industry bodies to replace LIBOR with an alternative known as Secured Overnight Financing Rate (SOFR) for USD LIBOR, which is expected to offer greater confidence and fewer risks. In addition, an incremental Credit Adjustment Spread (CAS) above SOFR would be applied as part of the ARR, since SOFR does not have the embedded bank credit component that is included in LIBOR. Therefore, the all-in rate for a loan transitioned to Risk Free Rates is comprised of three elements: The RFR, plus the CAS plus the agreed commercial margin.

Certain LIBOR-based contracts maturing post the end of 2021 will therefore need to be adapted and migrated to alternative reference rates before the respective cessation dates. This can be done by either converting the contract directly into an alternative interest rate or including robust fallback language transitioning to a new alternative interest rate at a future point.

Replacement criteria included methodological quality, accountability, governance, and ease of implementation. The New York Federal Reserve has published SOFR every day since early April 2018.

“Alternative Reference Rates Committee” on the Website of the NY FED

https://www.newyorkfed.org/arrc/sofr-transition

No action required

If your facility terminates (or final rate fixing is for any product) before the cessation dates of above-mentioned LIBORs, it can mature naturally, with no required action.

Please note that the extended timeline until 30th June 2023 is only usable for certain legacy transactions, although early opt-in by the Bank may trigger an early conversion. New business executed post the 31st of December 2021 may not be executed on a LIBOR basis and hence, would not be impacted or transitioned.

Action required

If your facility terminates (or final rate fixing is for any impacted product) after the mentioned dates for the cessation of above-mentioned LIBORs, then an action should be required.

Regarding the change, we would be reaching out to you to start a dialogue on LIBOR Transition for certain loan/s and / or derivative transactions. An objective of that communication is to achieve a mutual understanding on the terms of the transition towards an alternative reference rate for your facilities and/ or portfolio with the Bank and how the process will be organized. In that regard, the following high-level five-phase transition process is proposed:

  1. As per our remediation program and our focus on customer success, we have performed a preliminary analysis of your existing LIBOR based legacy contracts with various maturity dates after December 31, 2021.
  2. Given the potential risk of relying on the continued use of LIBOR for these contracts, we have analyzed feasible alternative actions. These include, among other actions, early movement to SOFR and amendment/ replacement of the contract. Early transition may be necessary in case market volatility is observed in which case we would inform you should such need arise.
  3. Through this outreach, we would like to focus on the first phase of the process, the factsheet presentation. For this, we want to ask you to have a glance at the factsheet attached (Annexure I), which provides information on the outstanding transactions between you and the Bank, which are in scope for transition / amendment.
  4. We want to reach an agreement on the legal aspects of the impacted transactions by Q2 2023. After an agreement is reached, the actual transition is prepared for execution.
  5. Subsequently, we will focus on pricing the impacted transactions. This will be followed up by the operationalization and execution of agreed terms.

Therefore, we would like to ask you to review the attached documents and let us know if you have any questions or comments. Your relationship manager will schedule time with you to review this information and discuss the actions that may best serve your needs.

Doha Bank (the ‘Bank’ and/ or ‘the Bank’) is giving to you this information with the understanding that the Bank is not rendering definitive legal, business, or financial advice to you as client to the Bank. The Bank cannot give you any assurance as to the outcome of any laws or regulations proposals in connection with LIBOR and how it might impact your product. Generally, working to transition your product actively away from an IBOR rate will provide clarity as to the rate of your product after cessation of that IBOR rate. You should consider now, and continue to keep under review, the potential impact of any future changes to IBOR rates.

Although we make strong efforts to make our information accurate and up to date, considering the fast developments in this sensitive area, the Bank cannot guarantee that the information is always complete. You are requested to seek advice from your advisors and be kept abreast and well-informed with the developments in this ever-evolving environment.

For more information in general on LIBOR Transition, we would like to refer you to the Bank’s website. If you have any other questions, please do not hesitate to contact us.

Yours sincerely,

Doha Bank QPSC
Regulated by the Qatar Central Bank

What is the international reform of interest rate benchmarks?

The London Interbank Offered Rate (LIBOR), considered one of the most important interest rates in finance, is scheduled to be phased out at the end of 2021. The industry players are taking steps to prepare for the coming change. Major central banks and regulators have decided to transition from the existing Interbank Offered Rates (IBORs) to alternative Risk-Free Rates (RFRs), also referred to as Alternative Reference Rates (ARRs). https://www.newyorkfed.org/arrc/sofr-transition

As LIBOR has the most exposure in products in the US, the United Kingdom, Europe, Switzerland and Japan, all of these representative countries have working groups that are seeking to develop possible replacements of LIBOR.

In 2014, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) to plan the transition away from U.S. dollar LIBOR. ARRC determined SOFR to be the U.S. dollar replacement rate.

IBOR transition – SOFR

The Secured Overnight Financing Rate (SOFR)

  • In 2014, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) to plan the transition away from U.S. dollar LIBOR. ARRC determined SOFR to be the U.S. dollar replacement rate.
    • Replacement criteria included methodological quality, accountability, governance, and ease of implementation.
    • The New York Fed has published SOFR every day since early April 2018.
  • It measures the cost of overnight borrowings through repo transactions collateralized with U.S. Treasury securities (the deepest and most liquid money market in the U.S.).
  • It is based on actual transactions and takes in more transactions than any other Treasury repo rate available, recently around a trillion dollars each day.
  • It is relevant to the cost of borrowing for a wide array of market participants.
  • It is constructed to meet the best practices for benchmarks set out by IOSCO and has been built to accommodate future market evolution.
Risk Free Rates

Risk Free Rates (RFRs) are benchmarks generally based on overnight deposit rates. It measures the cost of overnight borrowings through repo transactions collateralized with U.S. Treasury securities (the deepest and most liquid money market in the U.S.). For products that require a forward-looking rate, such as Trade & Islamic Finance, a term rate to be available.

Risk Free Rates

1 – Some of the overnight rates are unsecured with only a very small credit spread and some are secured and exclude credit risk completely. Especially in times of stress, secured and unsecured rates behave very differently – secured lending dries up. The economic difference to LIBOR, as well as the structural differences among the secured overnight rates corresponding to various currencies raise additional complexity.
How is Doha Bank responding to this, and what does this mean to our clients?

The Bank is following the market development and the guidelines issued by different regulatory bodies including the Central Bank of Qatar. Further the Bank is working to align the systems, processes and infrastructures to address the new requirements.

As the LIBOR transition enters its final stages, the Bank is mobilizing resources across the enterprise to achieve compliance with the Alternative Reference Rate Committee’s (ARRC) recommended timelines. The Bank has already identified the impacted areas, contracts and has taken remediation steps to minimize the migration risks. The progress of the initiatives are being monitored by the senior management of the Bank to ensure uninterrupted services to our clientele.

Steps for addressing the transition
  1. Current status assessment (Facilities, exposures and maturities including impacted pricing benchmarks)
    • Overview of outstanding transactions / contracts between Client and the Bank that are in scope for transaction repapering
    • Options on transition approach:
      • a. Active Conversion: Proactive negotiation of the conversion of transactions with the Bank in advance of LIBOR cessation in order to allow for custom outcomes in terms of timing and structure of transactions post conversion; or
      • b. Fall-back Conversion: Allow existing LIBOR transactions to incorporate market standard fallback provisions triggered by a LIBOR cessation event.
  2. Agreement transition terms
    • The impact on the outstanding transaction(s) in relation to transaction repapering;
    • The approach of transitioning for these transaction(s);
    • Conventions to use when transition the transaction(s);
    • The operational procedure of transitioning the transaction(s);
    • The date on which the transaction(s) will be transitioned.
  3. Pricing
    • Appropriately Pricing the transactions that are in scope of transition repapering.
  4. Execution
    • Execute the transactions that are in scope of transition repapering.
  5. Post transitioning support
    • Continuing to provide customer support post transitioning, where relevant.
Latest developments
  1. IBA confirmed its proposed dates to stop publishing USD LIBOR on a representative basis. Specifically, the FCA announced that the publication of LIBOR on a representative basis will cease for the one-week and two-month USD LIBOR settings immediately after December 31, 2021, and the remaining USD LIBOR settings after June 30, 2023.
  2. The US Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation announced that no new contracts referencing USD LIBOR can be issued beyond 31 December 2021. The UK’s FCA has already indicated that GBP LIBOR referencing contracts cannot be issued beyond Q1 2021, if their maturity date extends beyond 31 Dec 2021.
  3. Regulators in the USA, the UK and the Eurozone area continue to work towards developing term rates based on RFR, which can offer a forward-looking curve for associated contracts. Preliminary versions of Term SONIA (in the UK) have been available since 11 January 2021.
Any further questions?
  • For more information on the reform of benchmark rates, please reach out directly to your relationship manager.
  • We will continue to update you as interest rate benchmark reforms and transitions develop.
  • The information presented here is not intended to be a complete or exhaustive overview.
IBOR transition timeline
LIBOR Setting Last date of publication / representativeness Index Cessation Effective Date Spread Adjustment Fixing Date Interpolation Potential for Non-Representative, Synthetic Publication
USD LIBOR
Overnight and 12-month
USD LIBOR settings		 June 30, 2023 July 1, 2023 March 5, 2021 N/A N/A
1-week and 2-month USD LIBOR settings December 31, 2021 July 1, 2023 March 5, 2021 January 1, 2022 through
June 30, 2023		 N/A
1-month, 3-month and 6-month
USD LIBOR settings		 June 30, 2023 July 1, 2023 March 5, 2021 N/A July 1, 2023 onward

The London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is a benchmark rate at which banks estimate they can lend money to other banks on an unsecured basis.

LIBOR Panel Banks

  • 11-18 banks individually estimate the rate at which they would borrow from other banks.
  • Panel banks are asked the rate they would charge other banks for a given currency and a given period of time.

Submission

  • Banks submit rates to Inter-Continental Exchange (ICE) for overall LIBOR index calculation.

Calculation

  • ICE discards the highest and lowest submitted rates and calculates the mean of the remaining submitted rates.
  • LIBOR is calculated for 5 different currencies (USD, EUR, GBP, JPY, CHF) and 7 different maturities (overnight, 1 week , 1-month, 2-month, 3-month, 6-month, 1 year) – 35 LIBORs are required each day.

Application

  • LIBOR rate is not only an indication of interbank lending, but also used as a benchmark for over-the-counter derivatives, exchange traded derivatives, corporate bonds, business loans (syndicated and non-syndicated), floating rate notes, consumer loans such as mortgages, credit cards, autos), and securitizations.

Post the financial crisis, it became apparent that LIBOR was being manipulated. Certain financial firms misstated their LIBOR submissions, sometimes colluding with other firms to improve returns and avoid perception of financial weakness. Hence, global financial regulators decided that markets must move away from using LIBOR as a benchmark and have it replaced. The Alternative Reference Rates Committee (ARRC) was formed in 2014 to address concerns about reliability and robustness of existing reference rates in the U.S. One of its main objectives is to explore and provide guidance on alternative rates and to develop overall transition timelines.