The Reserve Bank of India (RBI) has set a deadline for banks and financial institutions to transition away from the scandal-ridden London Interbank Offered Rate (LIBOR) and Mumbai Interbank Forward Outright Rate (MIFOR) by July 1. They are expected to adopt the Secured Overnight Financing Rate (SOFR) as the primary Alternative Reference Rate.
Transitioning from LIBOR – Key Points
- Complete Transition by July 1: The RBI expects banks to have the necessary systems and processes in place to completely stop using LIBOR by July 1. The use of SOFR and Modified Mumbai Interbank Forward Outright Rate (MMIFOR) as benchmarks is encouraged.
- Reasons for LIBOR Phase-Out: LIBOR’s role in exacerbating the 2008 Financial Crisis and the manipulation scandals involving rate-setting banks have led to its phased elimination.
- Importance of Fallback Clauses: While some instances of Dollar LIBOR-linked financial contracts occurred after January 1, the RBI emphasizes the inclusion of fallback clauses in all relevant contracts to address this issue.
- Permanent Cessation of Dollar LIBOR: The publication of the remaining five Dollar LIBOR settings will permanently stop as of June 30. However, a few synthetic settings may continue to be published after June 30, 2023. The UK’s Financial Conduct Authority clarifies that these settings should not be used in new financial contracts.
- Cessation of MIFOR Publication: Financial Benchmarks India Pvt Ltd will cease to publish MIFOR, a domestically used interest rate benchmark tied to Dollar LIBOR, after the June 30 deadline.
RBI’s directive aims to ensure a smooth and timely transition away from LIBOR, promoting stability and integrity in the banking sector.
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RBI expects Banks to completely stop using LIBOR by July- FAQs
Q1: What impact will the transition away from LIBOR have on the MIFOR benchmark?
Ans: After the June 30 deadline, Financial Benchmarks India Pvt Ltd will stop publishing the MIFOR, an interest rate benchmark related to Dollar LIBOR. The move away from LIBOR entails the abolition of associated benchmarks such as MIFOR.
Q2: What will happen to the publication of Dollar LIBOR settings after June 30?
Ans: The remaining five Dollar LIBOR settings will no longer be published after June 30. While a few synthetic settings may be released after that date, they are not meant to be used in new financial contracts.
Q3: Will there be any exceptions or extensions granted for the transition away from LIBOR?
And: The RBI expects banks to meet the July 1 deadline and to have the necessary systems and processes in place. To preserve financial stability and integrity, the transition to alternative reference rates must be completed.
