The transition from LIBOR will bring considerable costs and risks for financial firms. Since the proposed alternative rates are calculated differently, payments under contracts referencing the new rates will differ from those referencing LIBOR. The transition will change firms’ market risk profiles, requiring changes to risk models, valuation tools, product design and hedging strategies.

LIBOR may become unavailable even though products referencing it remain in force. These contracts typically include “fall-back provisions”, which specify contract terms in case LIBOR is unavailable. If the period of unavailability is brief, as envisaged when the contracts were drafted, the resulting losses and gains are manageable. However, if fall-back terms are used for the remaining life of the contract, the economic impact is likely to be significant, with one side a winner and the other a loser.

London Interbank Offered Rates (LIBOR) are commonly used as benchmark/reference rates used in the financial markets globally. It is the basic rate used in lending between banks on the London interbank market. LIBOR is also used as a reference for setting the rate on other loans. It is unsecured interbank rate, quoted on a daily basis by panel banks for five major currencies for seven different terms based on expert judgement for their submissions.

Migrating from LIBOR will have a direct impact on many aspects of financial institutions’ operations and documentation among others. This would, among other things, impact the following:

• Finance originations,
• Derivatives contracts,
• Bond & capital markets transactions,
• Islamic Financing, Sukuk and Capital Market transactions.

In July 2017, the UK Financial Conduct Authority (FCA) reported that LIBOR will be phased out. After the end of 2021, the FCA has indicated that it does not intend to persuade or compel panel banks to submit the rates required to calculate LIBOR.

The publication of 24 LIBOR settings as below is set to cease after December 2021:

• All 7 EUR LIBOR settings,
• All 7 Swiss Franc LIBOR settings,
• Spot Next, 1 week, 2 months and 12 months Japanese Yen LIBOR settings,
• The Overnight, 1 week, 2 months and 12 months Sterling Pound LIBOR settings,
• The 1 week and 2 months US Dollar LIBOR settings,
• The publication of the rest for the remaining tenors such as (USD LIBOR for 1 month, 3 months, and 6 months) will cease after 30th June 2023.

These rates will be replaced by the following alternative benchmarks:

• In the US, the Alternative Reference Rates Committee (ARRC) has chosen Secured Overnight Funding Rate (SOFR) as the replacement.
• In the UK, Sterling Overnight Index Average (SONIA) has been chosen.  SONIA is the most actively traded replacement RFR.
• CHF LIBOR: Swiss National Bank working group on Swiss franc reference rates.
• JPY LIBOR: Bank of Japan cross-industry committee on Japanese yen interest rate benchmarks.
• EURIBOR: European Central Bank working group.

As per the guidelines Central Bank of Oman (CBO), no new financial contracts will be offered with LIBOR as the reference rate. Instead, we will be offering widely accepted ARR such as SOFR for USD contracts.

Customers with LIBOR exposures due to mature beyond 2021 (or June 2023, for certain USD LIBOR settings) are exposed to the risk of the permanent cessation of LIBOR. Upon the cessation of LIBOR, customers with LIBOR exposures could find their contracts and hedges no longer operate as intended. Furthermore, delaying the transition could lead to increased exposure to liquidity risk if market volumes are reduced, impacting contract repricing.

Customers should consider the transition of any contracts referencing LIBOR to the relevant RFR or an alternative rate as agreed between parties. This could be achieved by way of active conversion or including appropriate fallback language or otherwise in the relevant contracts.

We are in discussions with our customers in this regard to determine appropriate next steps. In the same time, we also encourage our customers to perform an assessment of their LIBOR-related exposures and take steps to understand the risks and impacts associated with LIBOR transition on their contracts and respective businesses, including any accounting, tax and operational implications.