LIBOR Transition

This notification is to inform you of changes that are expected to arise due to the planned discontinuation of Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR) at the end of December 2021 and the consequent changes to certain Schroder funds.

As part of an industry driven reform to strengthen the resilience of global financial markets, some interest rate benchmarks (including London Interbank Offered Rate – (LIBOR) and other Interbank Offered Rates (IBORs)) are being discontinued by the end of December 2021.

A significant decline in interbank lending and some high-profile instances of LIBOR manipulation resulted in the recommendation in 2014 by the Financial Stability Board to transition away from LIBOR and other IBORs to new alternative rates.

In response to this and subsequent announcements from the UK Financial Conduct Authority and other regulators globally, we will be replacing the benchmark for funds that currently use LIBOR with an alternative benchmark. The new benchmarks will be set out in the Hong Kong offering documents and the factsheet. The change is not expected to materially alter the way that a fund is managed or result in any additional charges to the fund. The funds’ allowable investments and the risk profile will also be unchanged to any material extent.

The timing of this transition for each individual fund will differ. Shareholders in funds will be notified in advance of any benchmark changes and from when these will take effect. We will select the benchmark which we believe is the most suitable alternative for any given fund. 

Luxembourg domiciled funds

If you have any questions about the proposal for any fund that you are invested in, please contact your usual professional advisor or the Representative at Level 33, Two Pacific Place, 88 Queensway, Hong Kong or calling the Schroders Investor Hotline on (+852) 2869 6968. Please be aware that Schroder Investment Management (Europe) S.A. does not offer investment advice.

Further information

Our FAQs provide further information on this change.

What is a benchmark? A benchmark is a standard against which the performance of a financial asset or a fund can be measured. Benchmarks are used in our funds for a range of purposes including as a standard against which to compare the return or “performance” of the fund, as a target for the fund’s performance and for defining what types and amounts of financial assets the fund may invest in. In some instances, they are also used to calculate performance fees that are paid to Schroders or a third party manager if the fund’s performance rises above a set threshold.

What is an interest rate? An interest rate is the amount a lender charges a borrower for a loan. Interest rate benchmarks are a form of benchmark that a lender may use as an element of the interest rate it charges a borrower for a loan. The lender may add a percentage to an interest rate benchmark to arrive at the amount of interest it charges the borrower. The London Interbank Offered Rate (LIBOR) is the most widely used interest rate benchmark in the world.

Schroders uses interest rate benchmarks as the benchmarks for a number of our funds.

Frequently Asked Questions for Shareholders (Dated: 31 March 2021)

LIBOR – An overview

The London Interbank Offered Rate (LIBOR) was officially adopted in 1986, with roots dating back to the 60s. Underpinning some $300 trillion (Refinitiv, October 2019) of financial instruments, it is one of the most widely quoted reference rates in the world. It is expected that most LIBOR settings and most other Interbank Offered Rates (IBORs) will cease to exist after the end of 2021.

1. What is LIBOR?

LIBOR is based on submissions by a panel of global banks. Each bank is asked every day to provide the rate at which they could secure short term lending from another major bank and those submissions are used to calculate LIBOR in accordance with an agreed methodology.

LIBOR is used as a reference rate in a wide range of financial contracts, including derivatives, bonds and loans. It is set for seven maturities (or tenors), ranging from overnight to 12 months, and five different currencies for each maturity. LIBOR rates exist for the US dollar, sterling, euro, yen and Swiss franc.

Where there are insufficient actual transactions or transaction-related data on which to base their LIBOR submissions, the panel banks must use their “expert judgement” within certain agreed parameters to provide their submissions.

2. Why is LIBOR being replaced?

A significant decline in interbank lending and some high-profile instances of LIBOR manipulation resulted in the publication of the Financial Stability Board’s (FSB) recommendation in 2014 to develop alternative so-called “risk-free” rates (RFRs) for use instead of LIBOR and other IBORs. In July 2017, the former Chief Executive of the Financial Conduct Authority (FCA) Andrew Bailey, said in a speech that “…the underlying market that LIBOR seeks to measure…is no longer sufficiently active.”

In the same speech, Andrew Bailey also said, “In our view, it is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them”. He went on to say that the FCA would not compel banks to make LIBOR submissions after the end of 2021 which was widely understood as a sign that LIBOR would cease to exist post-2021.

The FCA further confirmed that LIBOR would be discontinued at the end of December 2021 by publishing statements in September 2018 and February 2020 asking for firms’ plans for the transition away from LIBOR and setting out the FCA expectations for the end of LIBOR.

On 25 March 2020, despite the impact of the coronavirus on financial markets the FCA stated that the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet.

3. What is LIBOR being replaced with?

Following the FSB’s recommendation in 2014, industry working groups were established to develop the new Risk Free Rates (“RFRs” and also known as “alternative reference rates”) that are expected to replace LIBOR and other IBORs.

The new RFRs selected for the five major currencies of LIBOR are as follows:

4. When is LIBOR being replaced?

On 5 March 2021, the FCA has published a statement announcing the dates that all LIBOR settings will either cease to be provided by any administrator or no longer be representative. These dates are:

• Immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
• Immediately after 30 June 2023, in the case of the remaining US dollar settings.

The FCA has said that, based on undertakings received from the panel banks, it does not expect that any of the LIBOR settings will become unrepresentative before the relevant dates above¹. Representative LIBOR rates will not, however, be available beyond the dates above.

5. What is Schroders’ plan for the transition away from LIBOR?

Schroders has a robust plan for the effective management of the impact on our clients’ investments as a result of the transition away from LIBOR and has established a dedicated team responsible for this task.

Impact assessment

Schroders has completed an assessment to determine the impacts of the transition away from LIBOR, and certain other key IBOR, to RFR for our clients and our business. As part of this impact assessment we have analysed the work required to transition investments, change legal documents and update operational and technology systems.

Benchmark transition

Where our funds have LIBOR benchmarks these will need to be updated and there is a plan in place to migrate our fund benchmarks in 2021.  We have published an article explaining our plans to replace fund benchmarks and what it means for our clients.

Our funds’ LIBOR exposures

During the remainder of 2021 we aim to incrementally reduce our exposures to LIBOR. In addition to those funds that have a benchmark that references LIBOR, many of our funds have made investments in financial assets that reference LIBOR. Depending on the type of financial asset there are different ways in which the fund may transition away from such financial assets before LIBOR ceases to be published. Some financial assets will already contemplate LIBOR ceasing to exist and their terms will automatically change to an alternative rate. Other financial assets will need to be amended and our funds will be engaging with the relevant parties to try to agree a suitable amendment where possible. Other options are for the funds are to sell existing LIBOR-referencing assets and purchase other financial assets that already use an alternative rate. It is possible that some financial assets will not be easily amended or sold due to their terms or the lack of a buyer. We are discussing in industry working groups and with regulators the issue of those assets that are difficult to amend or sell.

By what date will Schroders stop referencing LIBOR for new business?

Schroders is committed to meeting the milestones set by the FCA, the ARRC and other global regulators and we are working towards the transition from LIBOR for all our funds by the dates of LIBOR cessation, in line with market developments, subject to viable alternative investments being available which reference RFRs.  

Shaping the future use of RFR, post LIBOR

We believe that it is essential for the industry to move together as a whole to define a consistent approach and that remaining in step with the broader industry will ultimately be in the interests of our clients. Schroders is participating in industry working groups (e.g. the Bank of England’s Working Group on Sterling Risk-Free Reference Rates (RFRWG)) and following developments in the transition away from LIBOR, with the aim of adopting, in due course, measures aimed at managing transition risks that are consistent with industry best practice.

6. What progress has been made globally for LIBOR transition?

The new RFRs have been selected for the five major currencies of LIBOR. In addition to this, interest rate benchmark transition is making good progress globally.

Asia

Across Asia, a multi-rate approach has largely been adopted for the transition away from LIBOR, which sees existing rates being used alongside replacement rates.

• China

In China the Shanghai Interbank Offered Rate (SHIBOR) is seen as a reliable benchmark and expectation is that it will continue in present format.

• Hong Kong

In Hong Kong, it is expected that an enhanced Hong Kong Interbank Offered Rate (HIBOR) will continue to exist alongside adjusted Hong Kong Overnight Index Average (HONIA) as the likely fallback rate.

• Indonesia

In Indonesia, the existing Jakarta Interbank Offered Rate (JIBOR) is being supplemented with IndONIA, which is replacing the overnight JIBOR as an overnight interest rate benchmark. JIBOR has also been enhanced with contributor banks having to quote rates by underpinning it to the greatest extent possible with transaction data in order to better reflect market rates.

• Singapore

In Singapore, a consultation report released on 29 July 2020 has recommended that the SGD Singapore Interbank Offered Rates (SIBOR) be discontinued in three to four years, and that the Singapore Overnight Rate Average (SORA) be used instead as the main interest rate benchmark for SGD financial markets.

The report recommends that the SIBOR tenors will be discontinued as follows:

• 12-month SIBOR will be discontinued by end-2020.
• 6-month SIBOR to be discontinued shortly after end-2021.
• 3-month SIBOR to be discontinued in three to four years (by end-2024).
• 1-month SIBOR to be discontinued in three to four years (by end-2024).

The Singapore Overnight Rate Average (SORA) or an adjusted form of the Singapore Dollar Swap Offer Rate (SOR) is expected to be the fallback rate for SOR.

• Australia

In Australia, a modified version of the existing IBOR, the AUD Bank Bill Swap Rate (BBSW), will continue to be used and co-exist alongside the Australian Interbank Overnight Cash Rate (AONIA) Australia’s new RFR.

Europe

Across Europe EURIBOR is a commonly used benchmark (Note:  different from EUR LIBOR).  Whilst EUR LIBOR is being discontinued, EURIBOR has recently been authorised under the EU Benchmarks Regulation and is expected to continue for the foreseeable future. 

7. Are there risks for investors resulting from the LIBOR transition?

There is arguably an inherent risk of market disruption in any significant regulatory transition exercise that impacts a significant number of market participants and instrument types.

However, market participants (including Schroders) are working to minimise the impact of LIBOR / IBOR transition, including impacts on investors in our funds, by adopting measures developed through market participant feedback on an industry-wide basis.

The conversion from a LIBOR-linked product to a RFR-linked product will most likely result in a payment being made from one party to the other to account for the change in the characteristics of the underlying reference rate. While the use of industry developed methodologies (such as those developed by ISDA for the derivatives markets) to calculate the alternative reference rate should help to minimise this value transfer it will not remove it entirely.  This payment could be due to or required to be paid by, a fund’s portfolio. These costs related to the transition will need to be considered as part of each fund’s transition.

¹ https://www.fca.org.uk/publication/policy/benchmarks-regulation-proposed-amendments-financial-services-bill.pdf

Alternative Reference Rate Committee (ARRC) – a group of financial industry participants focused on the successful transition from United States Dollars (USD) London Interbank Offered Rate to an alternative rate.

Benchmark (in context of Fund benchmark) – a standard against which the performance of a financial asset or a fund can be measured. Benchmarks are used in our funds for a range of purposes including a standard against which to compare the return or “performance” of the fund, as a target for the fund’s returns to outperform and for defining what types and amounts of financial assets the fund will invest in.  In some instances, they are also used to calculate performance fees, being fees that are paid to the investment manager of the fund if the fund’s performance rises above a set threshold.

Bonds or Notes – a form of financial asset that represents a loan from a financial investor (the bondholder or noteholder) to a borrower called the “issuer” (usually corporates or governments).

Credit Risk – the risk that a borrower will become bankrupt or otherwise fail to repay a loan.

Derivatives – a financial asset with a value that is set by reference to other assets e.g. shares, bonds, interest rates.

Fallback – a contractual term of a financial asset that outlines the alternative rate to be used if London Interbank Offered Rate or Interbank Offered Rate is discontinued.

Financial Conduct Authority (FCA) - the conduct authority for financial services firms in the United Kingdom.

Financial Stability Board – an international body that works to promote international financial stability.

Interbank Offered Rate (IBOR) - a rate at which major global banks expect they can borrow from other major global banks. This is often not based on actual loans between those banks but is created from estimates submitted by those banks.

Interest Rate – the amount a lender charges a borrower for a loan.

International Swaps and Derivatives Association (ISDA) -  a trade association representing participants in the derivatives market.

Maturities - represents the number of days before a financial asset must be repaid.

Portfolio – a range of investments held by a person or company.

Reference Rate - an interest rate benchmark used to set other interest rates in financial assets. London Interbank Offered Rate and Interbank Offered Rates are examples of reference rates.

Risk Free Rate – a reference rate that does not include in its calculation the credit risk of the borrower.

Risk Free Rate Working Group (RFRWG) - the Bank of England and Financial Conduct Authority’s group of financial services members focused on the transition away from London Interbank Offered Rate.

Important Information: This document should not be considered as legal or regulatory advice or relied upon as such. We encourage all our clients to seek independent legal advice in respect of their legal and regulatory obligations.