From January Next Year, LIBOR Rate Calculation to Cease... Banks Preparing Final Changes

Calculation of LIBOR rates for Euro, Yen, Pound, Swiss Franc, etc. will end on December 31 this year only

[Asia Economy Reporter Park Sun-mi] With the LIBOR rate calculation set to be discontinued in January next year, financial authorities and major banks are in the final stages of preparation. Banks are notifying customers about changes in interest rates used for foreign exchange fees and are halting new financial contracts linked to LIBOR. For contract extensions, they are taking final measures such as preparing additional agreements.

According to the financial sector on the 21st, the Financial Services Commission, Financial Supervisory Service, Korea Federation of Banks, and commercial banks held a LIBOR response task force (TF) meeting with working-level officials on the 15th. The meeting discussed whether the suspension of new contracts linked to LIBOR, in line with the schedule recommended by domestic financial authorities, has been properly implemented since this month, and whether there are any difficulties in changing or applying alternative reference rates.

A TF official explained, "In the process of changing and applying alternative reference rates instead of LIBOR, financial companies need to prepare additional agreements, but there have been difficulties in preparing these agreements promptly due to delays." He also added, "In the case of new contracts, syndicated loans must follow global trends, so domestic financial companies cannot make hasty decisions independently."

LIBOR is the benchmark interest rate used for domestic foreign currency loans and international financial transactions. It is the rate applied when trading short-term interbank funds in London, UK, calculated based on quotes submitted by information-providing banks in London. However, after the LIBOR manipulation scandal in 2012 revealed issues with the quoted rates, the UK Financial Conduct Authority (FCA), which regulates LIBOR, announced the schedule to discontinue LIBOR calculation in March this year.

According to the announced schedule, LIBOR calculation for the Euro, Yen, Pound, Swiss Franc, and other currencies will be discontinued as of December 31 this year. For the US dollar, 1-week and 2-month tenors will be discontinued by the end of this year, and other tenors will cease by June 30, 2023. Accordingly, our financial authorities set the recommended discontinuation dates to prevent market confusion: October 30 last month for cross-currency LIBOR and December 31 this year for the US dollar LIBOR.

Banks are finalizing alternative reference rates to replace LIBOR and are notifying customers about the discontinuation of LIBOR calculation. IBK Industrial Bank, which most recently completed notification on the 19th, informed customers that ▲interest applied to export-import related credit products (such as export bills purchase) and ▲interest applied when bills are discounted by overseas acquiring banks after the issuance of time-bound import letters of credit may change due to the discontinuation of LIBOR calculation.

The alternative reference rates replacing LIBOR are summarized as follows: ▲US dollar uses the risk-free rate for tenors (SOFR), ▲Japanese Yen uses TIBOR, ▲Euro uses EURIBOR, ▲British Pound uses SONIA, and ▲Swiss Franc uses SARON. Additionally, the banking sector is preparing alternative clauses (clauses applied when LIBOR calculation is discontinued before the maturity of existing contracts) for existing LIBOR-linked contracts, aiming to complete this by the end of this month.

Companies also need to prepare for the discontinuation of LIBOR calculation. A financial authority official stated, "Companies should first check whether they have financial contracts linked to LIBOR and reduce the proportion of LIBOR-linked contracts before the discontinuation of LIBOR calculation," adding, "They should proceed with changing to other alternative rate products in advance and incorporating alternative clauses."