THE CENTRAL BANK is requiring lenders to submit reports on their transactions that involve the London Interbank Offered Rate (LIBOR) and their transition to the use of alternative reference rates, with the LIBOR set to be sustained only until end-2021.

Memorandum No. M-2020-083 signed by Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier on Nov. 17 said market participants need to take steps to shift to alternative reference rates after the United Kingdom’s Financial Conduct Authority announced a transition away from LIBOR as a benchmark rate in July 17, with an agreement to use it only until Dec. 31, 2021.

“The Bangko Sentral expects every BSP-supervised financial institution (BSFI) with LIBOR or LIBOR-related exposures to have a viable transition plan in place to ensure that the cessation of LIBOR does not disrupt its operations and the efficient provision of services to its clients and other market counterparties,” the memorandum said.

Universal and commercial banks including their subsidiary banks are required to submit quarterly reports on their remaining LIBOR-related exposure. The reports will begin with the reference date of Sept. 30 until March 31, 2022.

“Banking transactions that may be referenced to the LIBOR include foreign-currency loans and bonds, and derivatives transactions (e.g., cross currency swaps). The pricing of the BSP EDYRF (Exporters Dollar and Yen Rediscount Facility) can likewise be expected to adopt market conventions,” Ms. Fonacier said in a text message.

Banks are also expected to detail their transition process away from the LIBOR.

The secured overnight financing rate (SOFR) of the US Federal Reserve may be used to take the place of the LIBOR, Ms. Fonacier said.

“But for term instruments, there are other alternatives under consideration since the SOFR is an overnight rate,” she added.

“BSFIs are reminded that the periodic quantification of LIBOR-related exposures is only one aspect of the transition process. Overall operational readiness is essential to the smooth adoption of alternative reference rates,” it said.

The BSP said it also expects lenders to be equipped with the necessary systems, infrastructure, and contractual arrangements in relation to the LIBOR phaseout. They are urged to inform the BSP of challenges they will encounter as they go through the transition.

“BSFIs are enjoined to keep abreast of transition initiatives taking place domestically and internationally, and to actively communicate with counterparties,” the memorandum said. — L.W.T. Noble