Companies across industries are experiencing issues and challenges due to transition from Interbank Offered Rates (IBORs) to Risk-free Rates (RFRs).
The transition from Interbank Offered Rates (IBORs) to so-called Risk-free Rates (RFRs) raises many issues and challenges for companies across industries and jurisdictions. One key area to consider is the impact on financial accounting and reporting and, most importantly, on hedge accounting. At their meeting on 20 June 2018, the International Accounting Standards Board (IASB) “noted the urgent need for IBOR reform and added a research project on the topic to their agenda.” The findings from this project will be discussed at future IASB meetings, with the potential to change accounting standards.
Regulators across the globe are encouraging the move from IBOR to RFRs in response to dwindling transactions in the interbank wholesale funding markets; the extensive use of IBORs in derivatives markets where an RFR is more appropriate; the use of expert judgment in IBOR submissions; and the potential risk of misconduct.
Currently, the financial markets are attempting to navigate the uncertain environment raised by the anticipated transition from IBOR interest rate benchmarks (such as London Interbank Offered Rates or LIBORs and Euro Offered Rates or EURIBORs) to alternative RFRs. Trillions of dollars of financial instruments reference IBOR benchmarks.
Transition from IBORs to alternative RFRs will affect a broad range of product types across multiple market segments. What this transition would mean in practice is that both new and legacy transactions (including over-the-counter (OTC) derivatives, exchange-traded derivatives (ETDs), securitized products, loans, bonds and mortgages) that currently reference an IBOR benchmark will, in most cases, need to reference a new RFR. This also applies to transactions not directly referencing an IBOR benchmark but valued using one as an input (for example, discounting cash flows now would need to be valued using an alternative RFR benchmark).