This notification has been prepared in relation to the use of benchmark interest rates such as USD LIBOR, EUR LIBOR, GBP LIBOR, JPY LIBOR, EURIBOR, EONIA or TRLIBOR (hereinafter referred to as "IBOR") in the calculation of interest rates in your transactions with our Bank, and aims to provide information on the transition process that will take effect if such benchmark rates cease to exist. It concerns real persons and legal entities that possess benchmark interest rate indexed financial products and/or are planning to engage in transactions related to such financial products.
What are benchmark interest rates?
Benchmark interest rates are the interest rates that are periodically announced to public by relevant authorities and are used as reference. Such rates can be used as reference in many financial contracts including derivative and loan contracts. Benchmark interest rates play a key role in the financial system and banking system, as well as the overall economy. As mentioned in the first part of this text, LIBOR, TRLIBOR, EURIBOR etc., which are collectively referred to as "IBOR" in general, can be given as examples to benchmark interest rates.
Why does the system require reforms to benchmark interest rates?
Many globally used benchmark interest rates have been going through a change.
IBOR interest rates play an important role in financial markets. However, these rates reduce in capacity to reflect the market due to reasons including the decrease in the volumes of transactions referenced in the determination of such rates and the issues arising in the process of maintaining bank data that ensures the determination of the rates. Cessation dates for LIBOR currencies and rates are as follows as announced by the UK's Financial Conduct Authority which regulates the calculation of LIBOR:
Please see the below table for detailed information on phase-out dates of the existing benchmark interest rates. This situation can also affect other benchmark interest rates by way of the existing benchmark interest rates completely ceasing to be published, losing their representativeness even if they are not ceased or undergoing a change. Indeed, in parallel to the developments in the existing benchmark interest rates published in the United Kingdom, certain countries also take similar decisions such as to cause the existing benchmark interest rates in their currencies to completely cease to be published, lose their representativeness even if they are not ceased or undergo a change. Dates in this regard may vary.
To this end, regulatory bodies and industry-specific associations recommend organizations to gradually move away from the existing benchmark interest rates and start using overnight and risk-free rates ("RFRs") based on real transactions as an alternative to the aforementioned benchmarks. Therefore, many countries including in particular the United States, the United Kingdom, the Eurozone and Turkey initiated studies/practices on various benchmark interest rates that can replace IBOR.
What are the alternative Risk-Free Rates (RFRs)?
Market participants and industry-specific institutions came up with alternative rates based on overnight transactions as a result of their studies to find a way to develop new alternative rates to the existing benchmark interest rates. As these risk-free rates, known as RFRs, are calculated based on transactions made in financial markets, the rates are expected to increase in capacity to reflect the market.
Below you can see a summary regarding the Risk-Free Rates determined for significant currencies:
|Existing Benchmark Interest Rate||Phase-Out Date||New Risk-Free Rate (RFR)||Related Authority|
For overnight, 1-3-6-month and 12-month tenors: 30 June 2023;
For 1-week and 2-month tenors: 31 December 2021.
(Secured Overnight Financing Rate)
(Alternative Reference Rates Committee)
|EONIA||3 January 2022||
(Euro Short-Term Rate)
(European Money Markets Institute)
|EURIBOR||Reforms in the EURIBOR methodology completed in 2019. It is not expected to be phased-out in the near future.||
(Euro Interbank Offered Rate)
(European Money Markets Institute)
|EUR LIBOR||31 December 2021||
(Euro Short-Term Rate)
(European Central Bank)
|GBP LIBOR||31 December 2021||
(Sterling Overnight Index Average)
(Bank of England)
|JPY LIBOR||31 December 2021||
(Tokyo Overnight Average Rate)
|Bank of Japan|
|CHF LIBOR||31 December 2021||SARON (Swiss Average Rate Overnight)||
SNB and SIX Swiss Exchange
(Swiss National Bank and SIX Swiss Exchange)
|TRLIBOR||3 June 2022||
(Turkish Lira Overnight Reference Rate)
(Istanbul Stock Exchange)
As part of the benchmark interest rate reform, Turkey also established a Turkish Lira Overnight Reference Rate (TLREF) within the scope of the studies in parallel to those of international institutions and with help from the Central Bank of the Republic of Turkey (CBRT) and other stakeholders to meet the need for a short-term benchmark interest rate in Turkish lira that will comply with the international standards and can be used as an underlying asset or benchmarking criterion in financial derivative products, debt instruments and various financial contracts. TLREF has been published by Istanbul Stock Exchange on a daily basis since June 2019.
What are the main differences between IBORs and Risk-Free Rates (RFRs)?
There are several main differences between IBORs and RFRs. RFRs are only available for an overnight tenor whereas IBOR benchmark interest rates have different tenors (e.g. 3-month, 6-month).
In addition, as several elements such as counter-bank loan risk or liquidity risk can be included in the pricing when calculating IBOR benchmark interest rates, a liquidity structure different from the one in RFRs may occur. Plus, IBORs take interbank unsecured loan transactions as basis whereas RFRs inherently take secured securities repo markets as their basis.
While RFRs are backward-looking, IBORs indicate the rate to apply for the amount for the relevant future term.
What are the possible affects for our customers?
As RFRs inherently take secured securities repo markets as their basis, their calculation methods are different from those applied in IBORs. Although a lower interest rate reflection is envisioned following transition to RFRs as compared to IBORs due to the methods used in calculations, the use of RFRs other than benchmark interest rates may affect our customers in several ways including but not limited to the following.
Due to the different methods used in RFR calculations, these rates may generally be at a lower level than IBORs. Therefore, when RFR is the most suitable benchmark interest rate for derivative transactions or loan transactions, there may be a need to add a certain level of adjustment spread to RFRs so as to prevent the transaction from providing economic benefit to one side compared to IBORs.
Your existing contracts may need to be inserted with a fallback clause due to IBOR no longer being able to be used. Our Bank will contact our customers in the upcoming periods for the update of their existing contracts where necessary.
As part of the change in IBORs, both the existing and new derivative transactions and/or loan transactions are expected to subject to a new interest calculation methodology due to transition to RFRs. Time to determine the interest payable (i.e. determining such at the end of the relevant period), publication frequency of RFRs, calculation method or application method may change in these methodologies and, accordingly, the amounts stipulated to be paid as part of your contracts signed with our Bank may also change, or additional costs may arise due to the operations in/management of this process.
Where can I find additional information?
Announcements on Cessastion and Loss of Representativeness of the LIBOR Benchmarks:
Information stated herein is for general purposes and does not include all details regarding the matter and therefore, should not be taken as a recommendation. In addition, changes may occur in certain points including but not limited to the cessation dates stipulated for IBORs or the calculation methodology and logic for RFRs. We recommend you to perform your own reviews and assessments, together with your independent experts, on the risks and details of the matter taking into account the uncertainty and complexity of the process.
Any cessation or change to the rates described as IBOR or RFR completely depends on decisions by administrative authorities and therefore, our Bank does not assume any responsibility or make any commitment as to any costs, expenses or payments including but not limited to any direct or indirect expenditure, loss of profit, tax, damage or loss that may arise due to the emergence of any change or risk or any consequential negativity in financial status or due to any change or cessation.