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IBOR transition

Clarification on the benchmark rate reform

Updated: May 28, 2021

As part of an ongoing reform of benchmark rates in international financial markets, some interbank rates, called "IBOR" for Interbank Offered Rates, will be phased out in the coming years. In accordance with the recommendations of regulators, central banks and industry groups, IBOR rates will be replaced by risk-free rates (“RFRs”). These are based entirely on actual transactions rather than on expert judgment.

If you have a National Bank financing product whose interest is calculated based on an IBOR, you’ll find the answers to your questions below. This information will be updated regularly as market developments occur. If you have any other questions, please contact your account manager. 

Frequently asked questions

Which IBOR rates are being replaced and when? 

Several IBOR rates will be replaced in the coming years. In the table below, we’ve narrowed the list down to only the rates used for National Bank financing products: 

Type of IBORs  End date announced  Expected replacement benchmark rate
CDOR  None, CDOR will co-exist with CORRA. (This rate is no longer available for 6- and 12-month terms.)  CORRA3
USD LIBOR  June 30, 20231. No new credit agreements after December 31, 20212.
EURIBOR None, EURIBOR will co-exist with ESTR.
GBP LIBOR December 31, 20211.

1 The official announcement of the cessation was made by the Financial Conduct Authority (FCA), the LIBOR regulator, on March 5, 2021. 

2 The announced end date for the USD LIBOR is June 30, 2023, except for 1-week and 2-month terms whose announced end date is December 31, 2021, as is the case for LIBOR rates for other currencies (EUR, GBP, CHF and JPY). However, the FCA and U.S. regulatory agencies expect financial institutions to stop using the USD LIBOR as a benchmark in all new agreements after December 31, 2021.  

3 Acronyms for the "Canadian Overnight Repo Rate Average," "Secured Overnight Funding Rate," "Euro Short-Term Rate," and "Sterling Overnight Index Average" respectively. 

What are the differences between IBOR rates and risk-free rates?

Risk-free rate
Term rate – rate set at the start of the interest period (prospective): overnight, one week and one, two, three, six and 12 months
Overnight rate – average simple daily rate or compounded in arrears calculated at the end of the interest period (retrospective)
Rates based partly on transactions and partly on expert judgment (for example, USD LIBOR is based on about $1 billion in transactions per day)
Rates based on actual transactions (for example, SOFR is based on about $1 trillion in transactions per day, 1,000 times more than the USD LIBOR)
Rates include a credit risk component since the bids on which the rates are based are not collateralized 
Rates include little or no credit risk component as the underlying transactions are collateralized in the form of government bonds

What will the impact be if I already have an IBOR in my credit agreement?

Your account manager will contact you before the end of 2021 to incorporate a hardwired fallback clause into your IBOR credit agreement or to replace the IBOR rate by an agreeable alternative reference rate, as the case may be. The hardwired fallback clause provides for the replacement of the applicable IBOR rate by the recommended adjusted risk-free rate either upon the IBOR discontinuation date or earlier, if agreed upon by us. If your credit agreement is not amended to incorporate the hardwired fallback clause before the end of 2021, we will replace the IBOR rate with a determined cessation date by an agreeable alternative reference rate when the credit agreement comes up for annual review. 

What will the impact be if I have a rate swap based on an IBOR rate? 

Whenever we incorporate the hardwired fallback clause or replace the IBOR rate of your credit agreement, if you have an interest rate swap to hedge the IBOR exposure of your loan, we will ensure that the change in the swap reference rate aligns with the amendment of the benchmark rate in your credit agreement. It will be important that the transition of the two instruments be handled simultaneously.

What is the ISDA protocol?

The International Swap and Derivatives Association (ISDA) has put in place a protocol to which market participants can adhere to inform their counterparties with derivative contracts that they agree to apply the rate replacement methodology determined by ISDA, which is to use the RSR compounded in arrears with a spread adjustment.

In short, if both parties to a rate swap concluded before January 25, 2021 have signed the ISDA protocol, the ISDA replacement methodology will apply to the transaction as soon as the relevant IBOR rate is discontinued.

For any rate swap concluded after January 25, 2021, the ISDA replacement methodology is integrated into the transaction and refers to the ISDA definitions amended on January 25, 2021. The protocol doesn’t need to have been signed by both parties. 

Should I adhere to the ISDA protocol if I have rate swaps with National Bank?

This solution could suit clients whose rate swaps aren’t used to hedge the rate applicable to a credit agreement. The replacement of IBOR rates on rate swaps used for hedging should be done in line with the replacement of the IBOR on the credit agreement through a bilateral negotiation process between National Bank and you.

What is the replacement rate currently on my credit agreement?

The current replacement clause provides that any further advances that are made when the IBOR rate is not available would be converted into a variable rate advance.

When will National Bank integrate the new benchmark rates into credit agreements?

The USD LIBOR rate won't be used in any new credit agreement entered into after December 31, 2021, in accordance with regulatory guidelines. All credit agreements renewed as of December 31, 2021 will have to use the new benchmark rate applicable at the time of renewal. Only credit agreements entered into before December 31, 2021 will be able to continue using the USD LIBOR until it’s no longer available (end date announced: June 30, 2023). However, these agreements will have to be amended by December 31, 2021 to include a hardwired fallback clause.

With regard to the CDOR and EURIBOR rates, which are not set to be phased out soon, we will incorporate hardwired fallback clauses once the methodology for replacing these rates has been agreed on and adopted by the banking industry.

As for the GBP LIBOR rate, it won't be used in any new credit agreements entered into after June 30, 2021, in accordance with regulatory guidelines. All credit agreements renewed as of June 30, 2021 will have to use the new benchmark rate applicable at the time of renewal. Only credit agreements entered into before June 30, 2021 will be able to continue using the GBP LIBOR until it’s no longer available (end date announced: December 31, 2021). However, these agreements will have to be amended by June 30, 2021 to include a hardwired fallback clause.

Where can I find more detailed information on the transition of benchmark rates? 

Our Economics and Strategy team has written a detailed background document on the Benchmark Rate Reform. This document, which is regularly updated, provides a comprehensive picture of past, current and future issues surrounding the transition of LIBOR rates and the broader reform of benchmark rates underway in international financial markets. You'll find a list of links to external content from relevant sources that we suggest you check out. 

Who can I contact if I have more questions on the impact of the transition on my products?

Your account manager is available to answer your questions, so please don’t hesitate to contact them. He will be able to direct any question requiring greater expertise to a group of experts at the Bank. 


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