IBOR reforms

Interest rate benchmarks including, among others, the London Interbank Offered Rate (LIBOR), the Euro Interbank Offered Rate (EURIBOR), the Euro Overnight Index Average (EONIA) and certain other Interbank Offered Rates (IBORs) have been or are being reformed or demised.

For several years, the financial services industry has been transitioning away from IBORs towards ‘Risk-Free Rates’ also known as ‘Near Risk-Free Rates’ (“RFRs”)¹ and other alternative rates.

The following rates have either ceased to be published or to be representative and their use has been prohibited for new contracts (except under limited circumstances):

• Sterling (GBP)², Euro (EUR), Swiss Franc (CHF) and Yen (JPY) LIBOR settings in all tenors;
• US Dollar (USD) LIBOR 1-week and 2-month settings;
• Euro Overnight Index Average (EONIA); and
• Canadian Dollar Offered Rate (CDOR) 6-month and 12-month settings.

The use of the following rates has also been prohibited for new contracts:

• US Dollar LIBOR Overnight, 1-month, 3-month, 6-month and 12-month settings
• Singapore Swap Offer Rate (SOR) and Singapore Interbank Offered Rate (SIBOR)
• Mumbai Interbank Forward Offer Rate (MIFOR)
• Thai Baht Interest Rate Fixing (THBFIX)

The following rates will either cease or no longer be representative immediately after 30 June 2023:

• US Dollar LIBOR Overnight, 1-month³, 3-month³, 6-month³ and 12-month settings.
• SOR, THBFIX, MIFOR and PHIREF will also be impacted because these benchmarks use USD LIBOR as an input. Our dedicated Asia-Pacific page provides further information.

The use of Canadian Dollar Offered Rate (CDOR) 1-month, 2-month and 3-month settings will be prohibited for use in new derivative contracts and cash securities after 30 June 2023. These CDOR settings will cease to be published after 28 June 2024.

IBOR reforms may impact the HSBC products and services you currently use and those we may provide in the future. The content of this page reflects HSBC’s understanding of the reforms as at 28 April 2023. It is not exhaustive and does not constitute any form of advice or recommendation. You should contact your professional advisors about the possible implications of the changes such as financial, legal, accountancy or tax consequences. Please read the content of this page carefully, together with any other communications you may have received from HSBC. Please contact us if you wish to discuss any of these changes further.

Regulatory authorities and public and private sector working groups in several jurisdictions, including the International Swaps and Derivatives Association (ISDA), the Sterling Risk-Free Rates Working Group (RFRWG), the Working Group on Euro Risk-Free Rates, and the Alternative Reference Rates Committee (ARRC), have identified and recommended alternative benchmark rates and best practice to support the transition of IBORs to these alternatives.

The table below sets out examples of benchmarks that have been or will be replaced or modified.

The dedicated Asia-Pacific page provides an overview of some of the benchmark reforms in Australia, China, Hong Kong, India, Japan, Korea, Malaysia, Philippines, Singapore and Thailand.

The table above is not exhaustive and is provided for general information purposes only. Other benchmarks may be discontinued or their methodology may be modified.

LIBOR and most other IBORs were intended to measure unsecured interbank lending rates and therefore included or implied an inter-bank credit premium.

RFRs are based on short-term wholesale transactions for unsecured RFRs (i.e. SONIA, TONA and €STR) and repurchase or ‘repo’ transactions for secured RFRs (i.e. SOFR and SARON). Due to their overnight and near risk free nature, RFRs do not include a credit premium.

IBORs are ‘term rates’, which means they are published for different periods of time such as 3 months or 6 months and are ‘forward looking’, which means they are published at the beginning of the borrowing period. IBORs therefore incorporate a term premium to compensate for the risk of default over the term for which they are calculated.

Most RFRs are ‘backward-looking’ overnight rates based on actual historic transactions. They are published at the end of the overnight borrowing period. RFRs therefore do not incorporate any term premium.

Forward looking Term RFRs are now available albeit not for all products as there may be regulatory restrictions to their use (e.g. Term SONIA) and not for all currencies, particularly those where there is no active and liquid derivatives market (e.g. CHF SARON).

Term RFRs provide an indicative, forward-looking measurement of RFR rates, based on market expectations implied from relevant RFR derivatives markets. They include expectations of future level of interest rates but do not include any interbank credit premium.

Due to these differences, adjustments for credit and term differences may need to be used to transition existing contracts and agreements that reference IBORs to RFRs.

HSBC’s product offering for USD Lending

For Lending products, HSBC offers SOFR in arrears, either compound or simple, in markets where we have the product capability as well as Term SOFR for those customers who prefer a rate set in advance.

Due to the ARRC’s recommendations on the use of Term SOFR derivatives⁴ and the lack of liquidity in the Term SOFR swap market, HSBC’s Term SOFR loan hedging offering is subject to certain criteria and restrictions (see below for more details).

Term SOFR will be offered for Trade alongside daily SOFR where requested or required.

HSBC does not offer any of the credit sensitive benchmark rates.

Overdrafts, where offered, typically use US Fed Funds target rate as standard but SOFR is available as an alternative on request.

HSBC’s product offering for USD Derivatives

HSBC follows ARRC’s recommendations4 that any use of Term SOFR derivatives should be limited to end-user facing derivatives intended to hedge cash products that reference Term SOFR.

On December 16, 2022, Michael Barr, the US Federal Reserve Vice Chair for Supervision, made it clear that “Overnight SOFR needs to remain the primary tool for derivatives and capital markets.”⁴

The US Financial Stability Oversight Council (FSOC) 2022 Annual Report also included the following recommendation: “While the Council recognizes the usefulness of Term SOFR in certain business lending transactions, it endorses the ARRC’s recommendations to limit the use of Term SOFR in other markets and strongly encourages market participants to limit the usage of Term SOFR in derivatives and most other cash markets.”⁴

Term SOFR is only available for vanilla interest rate swaps entered into with the following HSBC entities: HSBC Bank plc; HSBC Continental Europe; The Hong Kong and Shanghai Banking Corporation Limited in Hong Kong; and HSBC Bank Middle East Limited.

The use of Term SOFR to transition derivatives away from USD LIBOR gives rise to important risk considerations, including but not limited to:

• The Term SOFR swap market is illiquid and pricing may be unobservable. As a result, we would expect Term SOFR rates to be generally higher than SOFR Compounded in arrears.
• The interest rate for the whole interest period is based on observations from a single day’s futures transactions which may be affected by a spike in derivative prices on that day. Term SOFR swap valuation may be affected by the lack of liquidity, accounting policy and/or capital impacts, which may be interpreted differently by HSBC to other market makers.
• Due to the lack of liquidity and observable pricing in the Term SOFR swap market, restructuring or novating trades based on this rate may prove challenging in the future and may result in potentially significant costs to you at the time of restructure or novation.

These reforms may impact the HSBC products and services you currently use and those we provide in the future. The extent of the impact will depend on a range of factors including but not limited to the following:

• which IBOR is referenced;
• whether the relevant benchmark is being discontinued or if it has been, or is in the process of, being reformed;
• the nature of the "fallback" provisions, where the product includes such provisions (for example, the ISDA Benchmarks Supplement may be incorporated in your derivatives transactions);
• the adjustment for credit and term differences (i.e. between the IBOR and the alternative near risk-free rate) defined by industry working groups;
• the term of the product or contract;
• the date when regulatory reform, product or contractual changes will take effect; and
• the nature of the product.

The reforms could impact you in a number of ways, including possible changes to contractual documentation, adaption of operational processes/IT systems, changes to the value of products or the possibility of products no longer serving the purpose for which they were intended. Depending on the factors listed above, by way of example, the discontinuation of an IBOR referenced in a loan facility and its replacement by an agreed alternative benchmark may result in changes to the amount payable under the facility.

HSBC is actively monitoring developments and participating in a number of industry and regulatory working groups. HSBC will continue to provide more information on the changes as they become known at industry level.

We periodically update this page and provide communications relating to the changes. If you require any further information or have any questions, please contact your Relationship Manager. HSBC may also provide you with product or service specific information which you should consider carefully.

If you would like more general information on interest rate reform and IBOR transition, the Financial Conduct Authority (FCA), the Bank of England, the U.S. Commodity Futures and Trading Commission (CFTC), the Federal Reserve Bank of New York (FRBNY), the U.S. Alternative Reference Rates Committee (ARRC), the European Central Bank (ECB), the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO) and some of the working groups and industry bodies that are considering these issues have published information which can be found on their websites.

You should contact your professional advisors about the possible implications of the changes including those outlined on this page such as financial, legal, accounting and tax consequences. The content of this page is for general information only and on a strictly non-advised basis. It does not constitute any form of advice or recommendation, nor does it represent an exhaustive description of the impact, likelihood or consequences of any particular option or any particular risk applying to you or any of your contracts. HSBC is not your advisor and does not through this page or otherwise provide any advice or recommendation or product offering, nor does it assume any responsibility to provide advice.