This explanation and general risk warning is provided for information purposes only and is subject to change. This explanation and general risk warning is indicative only and not binding. Where information in this explanation and general risk warning has been obtained from third party sources, we believe those sources to be reliable, but we do not guarantee the information’s accuracy, and you should note that it may be incomplete or condensed.
What are benchmarks?
In general terms, a benchmark rate is a published reference rate against which payments, accruals or other rates applicable under a transaction are calculated. How FAB uses an IBOR in your product or agreement will depend on the nature of that product, and its relevant terms and conditions.
IBORs are used for many types of financial transactions. For example, a floating rate financing may use an IBOR as a benchmark for calculating the amount of profit, rental or returns (however described) that is payable by the customer. In more complex financial transactions such as hedging products, a profit rate swap may use an IBOR, or other rates that are derived from IBOR, to calculate the payments which the parties may need to pay to each other.
LIBOR and other IBORs are currently the focus of international and national reforms. The UK Financial Conduct Authority (‘FCA’), which regulates LIBOR, has stated that it will no longer compel banks to submit rates for the calculation of LIBOR after the end of 2021. The US Federal Reserve and other regulators have also taken measures to move markets away from IBORs within set timelines. As a result, the continuation of LIBOR and other IBORs on their current basis cannot be guaranteed after 31 December 2021.
These reforms may result in: (i) changes to the rules or methodologies used in calculating benchmark rates; (ii) restrictions on the use of benchmark rates; and/or (iii) discontinuance of benchmark rates. Even if certain benchmark rates might continue to be published, changes to their methodology, or restrictions on use, may mean that they are no longer representative of the underlying market and economic reality that the benchmark rate was originally intended measure or otherwise become no longer appropriate for products or agreements that customers have entered into with FAB.
FAB is not currently aware of any forthcoming changes to the Emirates Interbank Offered Rate administered by the Central Bank of the United Arab Emirates, which is also an IBOR and more commonly referred to as "EBOR" or "EIBOR". The Central Bank of the United Arab Emirates may in the future mandate reforms to this benchmark rate, and advance notice of the timing or nature of such changes may not be available to market participants.
Benchmark fallback arrangements including alternative rates
If benchmark rates such as IBORs are discontinued or otherwise become unavailable, or stop being appropriate for use in a product or agreement, then the calculation of amounts such as profit, rental, returns (however described) and other provisions which reference the benchmark will be determined using fallback arrangements (if any) set out in the relevant agreement.
The fallback arrangements that apply will depend on the terms set out in the relevant agreement. They may allow the affected benchmark to be replaced by alternative rates, such as using the rate published for the original benchmark for the last preceding calculation period; published quotations provided by reference banks; a specified successor rate, which may be a fixed rate; or another alternative benchmark that is generally accepted in the market as the appropriate successor to the original benchmark for a particular set of equivalent products. Additionally, an adjustment spread may be applied to the alternative rate, for example to produce an industry-accepted replacement rate for the original benchmark.
Technical, administrative and/or operational changes, as well as changes to certain payment calculation and/or payment mechanics of the Islamic product, may be required to reflect the adoption and implementation of an alternative rate. These changes can operate to result in changes to the timing and frequency of determining rates applicable to the Islamic product and the manner in which payments of profit, rental, return (however described) amounts may be made. Depending on the product and the relevant replacement rate, there may be some instances where a replacement product may be necessary in order to accommodate the adoption and implementation of an alternative rate.
Any changes made to FAB's products or agreements to reflect the adoption and implementation of an alternative rate shall be made in accordance with Shariah principles as advised to FAB by FAB’s own Shariah Supervision Committee (“ISSC”). Whilst FAB follows the guidance provided by its ISSC in relation to Shariah compliance of its products and agreements, it remains the responsibility of a customer to satisfy itself of matters of Shariah compliance. If you wish or need to enter into transactions, agreements and arrangements which comply with or are consistent with the principles of Shariah, you will need to make your own investigation with your own Shariah adviser, board or panel at the time to take all necessary action (including obtaining a declaration, pronouncement, opinion or other attestation of your own Shariah adviser, board or panel) to confirm that your transactions, agreements or arrangements with FAB are Shariah compliant for your own purposes.
Potential impact on agreements between you and FAB
The operation of the alternative rate and any adjustment spread may result in products or agreements performing differently than if the original benchmark rate had continued to apply. This could include variation or amendment to the calculation of profit, rental, return (however described) amounts, differences to related tax or hedge accounting issues, resulting mismatches with other transactions that you may have entered into with FAB or any third parties, as well as other possible effects.
You should consider now, and continue to review, the potential impact and risks of any future changes to benchmark rates for products and agreements between you and FAB. These may include, depending on the product:
- Fallback arrangements under the relevant agreement(s) becoming operative, which may change the rate used to calculate amounts that you pay or amounts that might be paid to you;
- Amendments to the calculation of amounts payable, which may change the amount of profit, rental or return that you pay or amounts that might be paid to you;
- Alterations to the payment mechanics of an existing product or the introduction of a replacement product in order to accommodate the adoption and implementation of an alternative rate;
- Consequential changes to other provisions, such as the calculation of margin that is payable and changes to associated fees and charges;
- Practical implications, such as changes to systems and accounting practices; and
- A mismatch between products that, by virtue of transition to an alternative rate, cease to be linked to the same underlying benchmark rate. This could, for example, affect hedging agreements associated with a facility.
This is not an exhaustive list and there are likely to be other factors for you to consider without reliance upon FAB. We recommend that you keep up to date with the latest developments in relation to the changes and the potential alternative benchmark rates that may be relevant to you.
For further information in relation to the transition away from LIBORs, including anticipated timeframes, please refer to the table below for details of the relevant LIBOR transition working group:
|LIBOR||Relevant Transition Working Group||Website|
|Sterling LIBOR||Bank of England and FCA working group||www.bankofengland.co.uk|
|US Dollar LIBOR||Federal Reserve Alternative Reference Rates Committee||www.newyorkfed.org|
|EURIBOR and EONIA||European Central Bank working group||www.ecb.europa.eu|
|JPY LIBOR and JPY TIBOR||Bank of Japan cross-industry committee on Japanese yen interest rate benchmarks||www.boj.or.jp|
|CHF LIBOR||Swiss National Bank working group on Swiss franc reference rates||www.snb.ch|
If you wish to discuss this further with us, please contact your FAB Relationship Manager or use one of the channels detailed here.
FAB does not accept any responsibility for, and shall not have any liability with respect to, the administration, submission or any other matter related to benchmark rates such as IBORs or any alternative rate including, without limitation, whether the composition or characteristics of any alternative rate will be similar to, or produce the same value or economic equivalence as, the original benchmark rates (including IBORs) or whether any alternative rate will have the same volume or liquidity as the original benchmark rate prior to its discontinuance or unavailability.
Except where we otherwise agree with you in writing, FAB does not provide advice, or recommendations on the suitability of your product choice or financing solution. You should consider whether you need to obtain professional independent advice (legal, financial or otherwise), prior to entering into any agreement or investing in a product which references a benchmark rate such as an IBOR. FAB does not owe you any duties or have any liability to you in relation to its management of the transition from IBOR benchmark rates to alternative rates. FAB is not under an obligation to update the information in this explanation and general risk warning.