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'Prepare for transition away from LIBOR': RBI tells banks, other entities

'Prepare for transition away from LIBOR': RBI tells banks, other entities

The RBI said banks and financial institutions are encouraged to cease entering into new financial contracts that reference LIBOR as a benchmark

RBI says banks should use any widely accepted alternative reference rate RBI says banks should use any widely accepted alternative reference rate

The Reserve Bank of India (RBI) has issued an advisory to banks and other RBI-regulated entities emphasising the need for preparedness for the transition away from London Interbank Offered Rate (LIBOR).

The RBI said banks and financial institutions are encouraged to cease entering into new financial contracts that reference LIBOR as a benchmark. It said instead, they should use any widely accepted alternative reference rate (ARR), as soon as practicable, and in any case by December 31, 2021.

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"Banks and financial institutions are urged to incorporate robust fallback clauses in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings," the apex bank said.

The RBI said banks and financial institutions should ensure that new contracts entered into before December 31, 2021 --  that reference LIBOR and the maturity of which is after the date on which LIBOR ceases -- include fallback clauses.
Banks should cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, as soon as practicable and in any event by December 31, 2021, it said.

The RBI said Financial Benchmarks India Pvt Ltd (FBIL) has started publishing daily adjusted MIFOR rates from June 15 and modified MIFOR rates from June 30, which can be used for legacy contracts and fresh contracts, respectively.

As per the RBI, contracts referencing LIBOR/MIFOR can generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR/MIFOR-referenced contracts undertaken before December 31.

Notably, the Financial Conduct Authority (FCA), UK, in a press statement on March 05, 2021, had announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative.

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