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Transitioning from LIBOR
The Financial Conduct Authority (FCA) announced in March 2021 that GBP, EUR, CHF and JPY LIBOR will cease after the end of 2021. Contractual parties must explicitly agree to switch to alternative rates prior to the end of 2021. The market accepted replacement rate are the “Risk Free Rates” (RFRs) such as the Sterling Over Night Index Average (SONIA) amongst others.
Why is LIBOR ceasing?
International regulators have been looking at reforming IBORs following the 2008 credit markets seizure. Since then, the number of interbank unsecured borrowing transactions has been steadily decreasing. As such, there has been a growing reliance on the expert judgement of panel banks on which to base LIBOR. This has led to concerns that LIBOR is no longer representative or a reliable benchmark reference rate.
What will replace IBORs?
Regulators have been promoting the development and adoption of RFRs, which are overnight rates. Working groups have been established across all major currencies to designate alternative overnight rates, such as, but not limited to the following:
- SONIA (GBP)
- SOFR (USD)
- ESTR (EUR)
- SARON (CHF)
- TONAR (JPY)
For example, SONIA has been in existence since 1997 and widely adopted as the alternative Sterling benchmark for derivatives, bonds and now loan products.
What is different about RFRs?
The key differences are:
- The precise interest payable for each Interest Period cannot be determined upfront until 5-banking days prior to the last interest accrual date, equivalent to 6-banking days from the Interest Payment Date. RFRs are true variable rates which will affect daily funding cost.
- A credit adjustment spread is added to bridge the gap between the discontinued benchmark and the new benchmark. The market favoured methodology is the ISDA 5-year historical median spread differences, which has since been fixed for each tenor following the pre-cessation announcement by the FCA.
- The market convention interest methodology is the in-arrears Compounded Rate method. This method has been widely adopted in the derivative and bond markets prior to its adoption in the loan markets. There are extensive materials produced by The Bank of England, the Loan Markets Association (LMA) and other industry bodies to educate and propel its adoption as part of the global push.
What does this mean for Leumi UK customers?
Leumi UK will no longer offer new products referenced to LIBOR.
Customers with lending agreements referenced to LIBOR can expect to receive Legal Addendums for their credit facilities. These Addendums contain amendments to existing terms and relevant schedules to enable a switch from LIBOR to an alternative rate on an agreed date. Customers are encouraged to sign and return their Addendums to their Leumi UK Relationship Manager at the earliest opportunity.
Conversely, customers with Notice Deposit products can expect to receive notice from Leumi UK to cease the product. Simultaneously, Leumi UK will present to customer options for their consideration, including the option to subscribe to a new Notice Deposit product referenced to an alternative rate.
Where can I independently seek data for RFRs?
The Daily overnight RFRs themselves are supervised and published by the competent authorities. Links to access historical RFR rates are available below:
- SONIA (GBP) published by the Bank of England
- SOFR (USD) published by the New York Federal Reserve
- ESTR (EUR) published by the European Central Bank
However, please bear in mind, that the use of Daily RFRs is dependent on the precise interest calculation methodology expressed in the agreement. The market adopted methodology is the Daily Compounded RFR in-arrears. This method is i) defined in LMA templated agreements, ii) replicated in the agreements between Leumi UK and customer and iii) illustrations can be found on the Bank of England website.
 Some IBORs have been enhanced by their regulator and will continue to be published. Examples are EURIBOR (EUR) and STIBOR (SEK).
 The US regulator had announced a limited cessation of USD LIBOR. Some USD LIBOR tenors will continue to be published until the summer of 2023. However, the authorities have made clear they do not expect counterparties to transact under USD LIBOR after the end of 2021. The rationale for the 2023 date is intended to assist parties remediate legacy contracts.