Information on changes to international benchmark interest rates

The below is for information purposes only, to inform you of changes taking place within the financial services industry. There’s no need to take any action for you or your clients.

At Columbia Threadneedle we are working to ensure minimal impact on our clients. We will communicate with you in due course if your investments are affected.

What is changing?

Changes are being made to a series of international benchmark interest rates, referred to as IBORS (International Benchmark Interest Rates) and including the London Interbank Offered Rate (LIBOR). LIBOR will be retired by the end of 2021, in favour of more robust, “risk free rates” or RFRs. Most other IBORs will also be replaced or reformed.

This change will  have impacts for asset management firms such as Columbia Threadneedle Investments and some of the investments we manage on behalf of our clients. Our overall exposure to IBOR/LIBOR is very small, and we do not expect material changes to the nature or risk profile of our investment funds or portfolios, or to the way they are managed.

The transition to risk free rates is a priority project for us, with executive sponsorship from our EMEA CEO Nick Ring. We have dedicated resources to manage the transition thoroughly and carefully to ensure a smooth experience for our clients and our business.

What is LIBOR and IBOR?
LIBOR, the London Interbank Offered Rate, is the interest rate that some of the world’s biggest banks estimate they would charge their peers for borrowing money from them. This rate is set in different currencies, and for different time periods. IBORs are other Interbank Offered Rates used around the world.

Both LIBOR and other IBORs are widely used as a short-term interest rate benchmark for financial products, including funds and investment securities (e.g. in bonds).

Why is this happening?
Fewer banks now wish to lend on an unsecured basis (i.e. not protected by collateral), and this reduction in activity has led to LIBOR becoming less representative of that market, making it both less reliable and volatile.

In 2017, the UK’s Financial Conduct Authority announced that as of the end of December 2021 banks won’t be compelled to support the LIBOR benchmark. All banks and market participants therefore need to work towards removing dependencies on LIBOR by this date¹.

We are working alongside our regulators to bring about the smooth transition away from LIBOR (and any other IBORs) to more robust risk-free rates (RFRs).
1 US Dollar LIBOR tenors (except one week and two month), have a deadline is mid-2023
What are RFRs?

RFRs are overnight deposit rates, based on the observation of real transactions as opposed to forward-looking, estimated bank submissions. The RFR chosen will differ by currency. In the UK, for example, the new benchmark will be SONIA, the Sterling Overnight Index Average. The below table shows some of the replacement RFRs now in place. Others may be created in due course (eg a forward-looking term rate). We are monitoring this closely and following recommendations from global working groups where appropriate.

Table 1: LIBOR alternative RFR for five different currencies

Currency
RFR
Working Group
Description
USA flag
US Dollar
Secured Overnight Financing Rate (SOFR)
Alternative Reference Rates Committee
A broad measure of the cost of borrowing cash overnight collateralised by U.S. Treasury securities.
Sterling
Sterling Overnight Index Average (SONIA)
Working Group on Sterling Risk-Free Reference Rates
Based on actual transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions.
Europen Union flag
Euro
Euro short-term rate (€STR)
Working Group on Risk-Free Reference Rates for the Euro Area
Reflects the wholesale euro unsecured overnight borrowing costs of banks located in the euro area.
An image showing japan flag
Yen
Tokyo Overnight Average Rate (TONAR)
Study Group on Risk-Free Reference Rates
An uncollateralised overnight call rate.
An image showing swiss flag
Swiss
Swiss Average Rate Overnight (SARON)
The National Working Group on CHF Reference Rates
A rolling, volume-weighted average based on transactions concluded and reference prices posted on a given trading day.

For information purposes only.

How is Columbia Threadneedle managing the transition? 

To manage the transition to RFRs, Columbia Threadneedle has established a multidisciplinary and global project team, overseen by a senior Operating and Steering Committee.

We are engaged with a number of industry forums to ensure we incorporate evolving best practice and are guided by our regulators.
We have undertaken a thorough assessment of financial and non-financial IBOR exposures across the firm. We have developed transition plans and are actively working through those plans in conjunction with third party vendors.
How will we transition IBOR-linked investments? 
Due to the nature and use of IBOR-based instruments within client portfolios, there is no uniform approach to managing exposures. We have assessed the IBOR exposures for each investment desk and client portfolio. Our transition plans are guided by external global working groups, and specific considerations relevant to each IBOR instrument type.

Our investment teams continue to assess any exposure to IBORs in their portfolios and monitor the securities’ underlying liquidity. Where possible, we are working with issuers and other market participants to proactively transition our existing exposures, for example through seeking consent. We will also limit new exposures to financial instruments that reference IBORs and have maturities beyond 2021.

How will we transition funds or mandates that use IBORs as benchmarks?
Where we use any IBORs within risk profiles, objectives or performance fee calculations, we are working through the steps to transition these to the appropriate alternative benchmarks, following a market standard approach and official recommendations.
What does all this mean for you?
You do not need to take any action at this stage. We are committed to ensuring you are appropriately informed and prepared for the upcoming transition.
We are in communication with affected clients in order enable them to consider all the impacts and options available.
If you have any questions about what these changes mean, please contact your usual Columbia Threadneedle representative.