IBOR transition, frequently asked questions

Interest rate benchmarks, also known as base rates or reference rates, are globally used as a basis to determine amounts payable, in particular interest payable, for a wide range of financial products. These include foreign exchange accounts, overdrafts, term loans, derivatives, structured products and retail mortgages. For example, the interest due isbased on an interest rate benchmark such as EURIBOR or LIBOR plus a margin.

Interest rate benchmarks play an important role in price transparency, as they provide an independent measure for the valuation of contracts for financial products. While a variety of interest rate benchmarks exists, the most widely used interest rate benchmarks are the sterling and US dollar London Interbank Offered Rate (LIBOR) and the European Interbank Offered Rate (EURIBOR).

Due to international developments and European regulations, a number of well-known and widely used interest rate benchmarks (Interbank Offered rates or IBORs) are being or have recently been reformed or are expected to be discontinued and replaced with alternative (nearly) risk-free rates (RFRs).

For each IBOR benchmark rate and the alternative benchmark rate the developments are at different stages and vary in scope and transition time. The worldwide benchmark reform is a continually evolving process across multiple product areas and jurisdictions. For example, quote-based GBP LIBOR has been discontinued on 31 December 2021, whereas most tenors of USD LIBOR will continue until 30 June 2023. At the same time, EURIBOR has been reformed and is not scheduled to be discontinued soon.

The benchmark reforms may impact ABN AMRO’s products and services you are currently using and those we may provide in the future. If this applies to your contract(s), we will inform you in a timely manner and provide you with more detailed information about any changes.

As interest rate benchmarks are fundamental to so many contracts for financial products, they need to be robust, reliable and resilient. Most of the interest rate benchmarks subject to reform or discontinuation are Interbank Offered Rates (IBORs). These rates are based on interbank rates. They reflect how much it costs for banks to borrow from each otherfor different borrowing periods, ranging from one day to one year. These rates are/were not based on actual transactions, but on estimates. For example, for many years LIBOR has been calculated based on a daily survey of banks. Each bank that contributes to the LIBOR estimates what it would be charged were it to borrow from other banks. This method for determination of interest rate benchmarks has proven to be sensitive to manipulation. In addition, in the recent years the underlying markets for interbank lending transactions has significantly decreased (and continues to do so) causing the representativeness of some benchmarks to come under even more pressure. For these reasons, a world-wide transition from IBORs to alternative interest rate benchmarks is currently taking place. In Europe, thisbenchmark transition is governed by the EU Benchmark Regulation (BMR).

Some well-known and widely used benchmark rates will be or have been reformed in order to increase their reliance on actual transactions (e.g. EURIBOR). Others have been discontinued (e.g. GBP LIBOR) and replaced with alternative interest rate benchmarks that meet the new regulatory and market requirements (e.g. SONIA-based rates). In addition, regulatory supervision of benchmark administrators, contributors and benchmark users (such as banks) has been reinforced.

In Europe, the benchmark transition is governed by the EU Benchmark Regulation (BMR). The BMR came into effect on 1 January 2018, with a transitional regime applying until the end of 2021. The BMR aims to enhance the reliability and robustness of benchmarks, sets out general rules on how benchmark administrators must conduct their activities and provides requirements about input data and the calculation methodologies of benchmarks. Also, it regulates the appropriate use of benchmarks. The Dutch Authority for the Financial Markets (AFM) supervises ABN AMRO's implementation of the BMR.

To enhance an orderly benchmark transition, regulatory authorities and central banks have established industry-led working groups tasked with recommending alternative reference rates and plans for adopting them. The main working groups are:

• in Europe, the Working Group on Euro Risk-Free Rates;

• in the UK, the Working Group on Sterling Risk-Free Reference Rates;

• in the US, the Alternative Reference Rates Committee;

• in Switzerland, the National Working Group on Swiss Franc Reference Rates; and

• in Japan, the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks.

Products that are impacted by benchmark reforms are products that are linked to an Interbank Offered Rate (IBOR), such as GBP LIBOR or USD LIBOR. For example, the contracts for these products state that the interest payable is based on an IBOR plus a margin, for example 3-month USD LIBOR plus a margin.

Examples of products that are linked to IBORs include (but are not limited to):

• retail mortgages with a variable interest rate linked to an interest rate benchmark (i.e. not fixed rate mortgages or mortgages on the basis of an “all-in” variable rate);

• overdraft facilities linked to an interest rate benchmark plus a margin;

• bilateral or syndicated loans linked to a variable interest rate;

• bank accounts in foreign currencies (FX accounts); and

• derivatives (for example an interest rate swap).

• Please note that a contract linked to certain LIBOR rates may need to be amended depending on its maturity date. Does the contract terminate before the relevant interest rate benchmark ceases to exist? No actions are needed. If the contract terminates after the relevant LIBOR will cease to exist, the contract needs to be amended to reflect a suitable alternative interest rate benchmark. We will let you know in a timely manner if this applies to your contract(s). And what the changes entail.

• Is your contract based on EURIBOR? Then the contract needs to contain a robust fallback provision for the event EURIBOR would cease to exist. This is a regulatory requirement. At this moment in time, EURIBOR has been reformed and as such is not scheduled to be discontinued. Therefore, EURIBOR itself does not have to be actively replaced in your contract.

Contracts for products that are based on a fixed interest rate, or a variable interest rate that is not based on an IBOR (for example an “all-in” variable interest rate or “Cost of Funds”) do not have to be amended.

As a supervised entity that uses benchmarks, we are required to comply with the regulatory requirements laid down in the EU Benchmark Regulation (BMR). This means, among other things, that we are required to have a robust written (contingency) plan in place that deals with cessation or material changes of benchmarks (Article 28(2) of the BMR). Where feasible and appropriate, the plan nominates one of more alternative benchmarks that could be referenced to substitute benchmarks no longer provided, indicating why such benchmarks would be suitable alternatives.

ABN AMRO has written a plan for cessation or material changes of benchmarks (Fallback Plan) setting out the action that we would take in the event that a benchmark materially changes or ceases to be provided or the benchmark administrator (and the benchmark itself in case of a non-EU benchmark) is not included or will no longer be included in the ESMA register. The Dutch Authority for Financial Markets monitors the Fallback Plan of ABN AMRO.