South Africa’s major corporates seem not to have awakened yet to the fact that in a few years interbank offered rates (such as LIBOR and JIBAR) will transition to alternative reference rates. This transition will be one of the most significant transformations of interest rate benchmarks in the last 25 years, but are major corporate treasurers fully aware of the challenges ahead? How can they ensure their business is well prepared to handle the possible disruption caused by this transition?
IBOR transition is a fundamental issue for financial market participants. Regulators across the world have made it clear that the discontinuation of interbank offered rates (IBOR) rates by the end of 2021 and their replacement with a new set of reference rates, the so-called Risk Free Rates (RFR), is a certainty and market participants are urged to plan accordingly.
IBOR rates have been, and still are, at the core of the financial system, providing a reference for the pricing of a wide array of financial contracts, including derivatives, loans and securities. Hundreds of trillions of dollars’ worth of financial contracts reference interbank offered rates in one of the major currencies and it is difficult to overstate the scale of funding and investment activity based on IBOR rates.
Notwithstanding the combined efforts of regulators, central banks and industry groups focusing on developing alternative reference rates and robust contractual fallbacks to manage the transition as smoothly as possible, firms cannot just sit and wait, but will instead have to take action in order to adequately prepare for the discontinuation of interbank offered rates.