CBS and banking community gear up for LIBOR transition |05 November 2021

Ms Sullivan and Ms Jumaye-Hoareau during the press conference yesterday (Photo: Thomas Meriton)

The Central Bank of Seychelles (CBS) is working with the banking community to ensure a smooth transition from the London Interbank Offered Rate (LIBOR) to alternative reference rates now that the LIBOR will be phased out from the end of December 2021.

This was announced by Jenifer Sullivan, second deputy governor of the Central Bank of Seychelles in a press meeting yesterday at the Central Bank.

LIBOR is one of the main interest rate benchmarks used globally in financial markets for over 30 years.

Shireen Jumaye-Hoareau, portfolio analyst at CBS, explained what LIBOR is and how it functions.

LIBOR is regulated by the United Kingdom’s Financial Conduct Authority (FCA) and is administered by the Intercontinental Exchange Benchmark Administration. It is derived from the rates at which a group of panel banks indicate they are willing to lend to each other on an unsecured basis. LIBOR is published daily in five different currencies – United States Dollar (USD), Euro (EUR), Pound Sterling (GBP), Swiss Francs (CHF) and Japanese Yen (JPY), and in seven different tenors, notably overnight, 1-week, 1, 2, 3, 6, and 12 months. Financial institutions use the published rates as a benchmark for various financial products and contracts, such as loans, bonds and others.

It is to be noted that it was in 2017 that the FCA formally announced that it would no longer compel banks to submit rates for the calculation of the LIBOR after 2021, given that following the global financial crisis in 2008, the market for unsecured wholesale borrowing from which LIBOR was being derived was no longer sufficiently active.

In March 2021, the FCA announced that the publication of all GBP, EUR, CHF, JPY and the 1 week and 2 months USD LIBOR will cease after December 31, 2021. Publication of the USD overnight, 1 week, 1, 3, 6 and 12 months LIBOR will be discontinued after June 30, 2023. As such, no new transactions or contracts referencing LIBOR should be initiated after 2021 and market participants are being encouraged to start making use of the alternative rates.

LIBOR Alternative Reference Rates

Alternative benchmark reference rates that have been developed as potential replacement to the current LIBOR are outlined below:

USD – Secured Overnight Financing Rate (SOFR); EUR – Euro Short Term Rate (ESTR); GBP – Sterling Overnight Index Average (SONIA); JPY – Tokyo Overnight Average (TONA) and CHF – Swiss Average Rate Overnight (SARON).

The transition to the proposed alternative rates will directly impact individuals and institutions that have investments and contracts in foreign currency, which use LIBOR as the reference rate with maturity dates beyond December 2021.

Like regulators in other countries, CBS has been closely monitoring developments surrounding the transition process and the impact on Seychelles’ financial market. Through engagement with the banking community, it has been established that there are about 230 clients across three commercial banks – ABSA Bank (Seychelles) Limited, Mauritius Commercial Bank (Seychelles) Limited and Nouvobanq who have exposure to LIBOR through foreign currency denominated facilities.

The three banks have developed their respective action plans, which include reviewing the contracts of their impacted clients as well as informing them of the effect of the transition on their existing contracts and the appropriate steps that need to be taken.

The head of Business Banking at Absa Bank (Seychelles) Ltd, Egbert Laurence, has  reassured the public that, “for Absa Bank (Seychelles) there are around 60 clients who have loans/overdrafts using LIBOR. The accounts are mainly in dollars and mostly Euros and they are mainly term loans. For this year 2021, there are only three clients who will need to change their contract. For some time now Absa has been giving loans in Euros. We were using the Euro Interbank Offered Rate (Euribor) and for these cases we do not need to change their contracts. The changes will happen only for those having a dollar account with a loan. From our bank most of our liable had a duration of 1 month or 3 months and the expiry date is set for June 2023. The bank has some time to address these cases. Absa has only the cases that will expire before the end of the year and which need to be renewed.”

Mr Laurence remarked that for some time now Absa was preparing itself for such a transition. “We have our internal committee and support from Absa Africa. We had webinars with our clients to inform them about the changes and from that time we kept our clients informed through emails. The next part will be to relook at the contracts and do some adjustments with the clients. We also did training for our staff.”

The head of credit department at Nouvobanq, Philippe Pierre, added that they have some 30 clients who use this facility. “On our side, we did some research and we devised a strategy on how to implement the transition. Nouvobanq has also decided to use the SOFR. We have already informed our clients and will also see the impact this transition has on our banks. We will also meet our clients and then move to a new contract. Most of our facilities come from the tourism and hospitality sector. By November 19 we are making sure to contact most of the clients concerned with this transition. Our staff members have also been trained and are ready to implement the new rate. All in all, we will make sure that our clients will not be worse off.”

Dolly Tirant, head of corporate & SME at the Mauritius Commercial Bank (Seychelles) Ltd shared that the MCB Seychelles has also started to advise its clients about this transition and they have some 100 clients.

“Starting this month, we are engaging with the concerned clients on a one-to-one basis for further discussion and also to respond to any queries they have concerning this transition. Their loans are not changing, their agreements also are not changing but what is changing is the reference rate. Most of our facilities are in Euros and Dollars and we were based on LIBOR and we need to change both. Our employees have also been trained since a few months back and they completely understand the impact. Employees will be fully engaged with clients in this process and we are making sure we are adhering to international norms. Rates we are using are international rates that are being regulated by regulators in that country. We are not inventing anything new and we are currently engaged with our clients.”

It is important to note that the CBS does not regulate LIBOR and cannot enforce the adoption of a particular replacement rate by the individual banks locally. Nevertheless the CBS will continue to engage with the banks to ensure that they are effecting the transition to alternative rates and keeping their clients well informed throughout this process.

CBS press release/Vidya Gappy