Financial Conduct Authority announced that LIBOR will no longer exist
The London Interbank Offer Rate (“LIBOR”) was one of the most popular benchmark interest rates linked to interest rates around the world. Frequently, the variable rate lending products were linked to LIBOR to determine the final interest rate. Due to several allegations and manipulations related1, the Financial Conduct Authority (“FCA”), United Kingdom, announced in a press release dated 5 March 20212 that all London Interbank Offer Rate (“LIBOR”) settings are either no longer provided by an administrator or are no longer representative (i) all Sterling, Euro, Swiss Franc, Japanese Yen and US Dollar 1-week and 2-month adjustments after December 31, 2021; and (ii) in the case of Overnight, the 1 month, 3 month, 6 month and 12 month maturities will terminate immediately after June 2023. As per the above FCA press release, the Reserve Bank of India (“RBI”) had issued several notices and notices3 for transitioning from LIBOR to another commonly accepted Alternative Reference Rate (“ARR”).
On December 08, 2021, RBI announced the External Commercial Borrowings (ECB) and Trade Credits (TC) Policy – Changes due to LIBOR Transition (“ECB LIBOR Notification”).4 Accordingly, the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations updated on 10 December 2021 reflects the following changes communicated as part of the ECB Communication:
1. Redefinition of the reference interest rate for ECBs in foreign currencies (“FCY”) and trade credits (“TC”): Prior to the ECB LIBOR announcement, the reference interest rate for FCY ECB/TC was pegged to another 6-month LIBOR rate currencies or any other 6-month interbank interest rate applicable to the borrowing currency. Now the same has been updated to “any widely accepted interbank rate or alternative reference rate (ARR) with a maturity of 6 months applicable to the currency of borrowing”.
2. Changing the all-in-cost cap for new ECBs/TCs: As there would be differences in the credit risk and term premiums for the LIBOR-pegged loans compared to the ARRs, the RBI has attempted to offset this by increasing it offset the annual all-in-cost cap on new FCY ECBs and TCs by 50bps to 500bps and 300bps, respectively, above benchmark interest rates.
3. One-time adjustment of the all-in-cost cap for existing ECBs/TCs: For reasons similar to those stated in (ii) above, RBI has revised the annual all-in-cost cap for the existing FCY ECBs and TCs increases 100 bps to 550 bps or 350 bps above benchmark rates. However, an obligation has been placed on AD Tier I banks to ensure that such a change in the cap of existing FCY ECBs/TC only occurs as a result of the transition from LIBOR to ARR.
Furthermore, the all-in-cost benchmark or cap for INR ECBs/TCs has not changed and remains 450 basis points above the benchmark rate.
REACTION OF MARKET PARTICIPANTS
Most financial institutions began phasing out LIBOR and replacing it with alternative benchmarks well before the December 31, 2021 deadline. There are several ARR benchmarks, but none has been used as widely as LIBOR. Some of the market leaders are now pegging their interest rates to the Secured Overnight Financing Rate (“SOFR”) and the Sterling Overnight Interbank Average Rate (“SONIA”).5
IMPACT ON FCY ECBS
The way forward for the new ECB contracts to be executed by the financial institutions is comparatively easier as they will negotiate interest rates based on the new ARR from the start. Conversely, existing FCY-ECB contracts executed prior to December 31, 2021 that are linked to LIBOR and mature after December 31, 2021 will need to be amended by the relevant parties to include ARR instead of LIBOR.
RBI has taken a very proactive approach by notifying stakeholders almost 2 (two) years prior to the LIBOR transition, allowing ample time to put in place appropriate systems and mechanisms to manage this change. There may be some issues that the parties need to deal with in terms of adapting to the new ARR, calculating interest, contacting all relevant parties for the execution of amendment agreements, etc. However, given the history of LIBOR systems and the attitude of stakeholders, the market for non-LIBOR ECBs could turn out to be better off.
Akash Kumar also contributed to this article.
1 The State Bank of India, LIBOR TRANSITION COMPENDIUM, available at
2 FCA’s Announcement of the Future Discontinuation and Loss of Representativeness of the LIBOR Benchmarks dated 5 March 2021, available at
3 RBI press release, Discontinuation of LIBOR: Transitional regulations, from 07/08/2021; RBI Notice on Use of an Alternative Reference Rate instead of LIBOR for Interest Payable in Relation to Export/Import Transactions dated 28 September 2021.
4 RBI Notice, External Commercial Borrowings (ECB) and Trade Credits (TC) Policy – Changes due to LIBOR Transition, Notice No. RBI/2021-22/135 AP (DIR Series) Circular No. 19 dated 08.12.2021 .
5 SBI introduces new benchmark interest rate, cuts decades-old Libor, available at:
LIBOR is set to go and SOFR will replace it as the new benchmark: five questions answered, available at
Nishith Desai Associates 2022. All rights reserved.National Law Review, Volume XII, Number 255