Mumbai: Reserve banks on Thursday asked banks and financial institutions to use extensive (AAR) alternative reference levels, not LIBOR (London Interbank offered levels) as a reference level to enter a new financial contract.
Bank reserve instructions followed the decision of the Financial Conduct Authority (FCA), England which on March 5, 2021 has announced that all LIBOR settings will stop given by any administrator or will no longer be representative.
To handle the arising situation, the RBI has asked banks and financial institutions to “stop entering new financial contracts that refer to LIBOR as benchmarks and instead of using alternative reference rates widely accepted (ARR), as soon as possible and enter any case On December 31, 2021.
“Financial Institutions, suggested, must combine a strong fitback clause in all financial contracts that refer to the libor and maturity after the date of cessation of the libor announced.
RBI also suggested financial institutions to stop using Mumbai Interbank Forward Outright Rate (MICC), a benchmark that referenced LIBOR, the latest on December 31, 2021.
The Reserve Bank of India (RBI) has been in August 2020 requested a bank to frame the plan approved by The Board, describes the assessment of exposure associated with LIBOR and steps that must be taken to overcome the risks arising from termination of LIBOR, including preparation for ARR adoption.
While the setting of certain US dollars will continue to be published until June 30, 2023, the extension of the timeline for termination is primarily aimed at ensuring a roll-off of a legas contract related to LIBOR, and does not encourage dependence on LIBOR.
“Therefore, it is estimated that the LIBOR reference contract is generally carried out after December 31, 2021, only for the purpose of managing the risks arising from the LIBOR contract (eg hedging contracts, novations, market making in support of client activities, etc.), contracted on or before December 31, 2021, “said RBI.
It has also asked banks and financial institutions to include a strong Fallback clause, preferably before the date of each termination, in all financial contracts that refer to the libor and maturity of them after the date of cessation of the libor announced.
The central bank also said it would continue to monitor the global and domestic situation that developed in connection with the transition which was far from LIBOR and proactively took steps to mitigate related risks to ensure a smooth transition.