This survey of banks and corporates looks at the impact of the London Interbank Offered Rate (LIBOR) cessation for trade finance during a critical inflection point in the path to transition to alternative rates. Progress toward the demise of LIBOR accelerated during the second quarter of 2021. After years of preparation for the cessation, there is now a clear time frame to transition away from the rate that has long been the default benchmark interest rate for trade finance. The findings in this report showcase that the uncertain availability of term rates across currencies remains an acute challenge for banks, but even without a clear solution in hand, communicating with affected customers and third parties throughout the process is critical and must accelerate.
While USD LIBOR is the most widely used benchmark across the trade finance industry globally, the transition of GBP and other LIBOR currencies will also impact the trade finance business. Trade finance products broadly reference LIBOR term rates due to their transparency of pricing and certainty of funding costs. This element is critical, especially for financing offered at a discount, where the value of the discount needs to be determined at the start of the transaction – a case that BAFT has made to regulatory authorities in the U.S. and UK. Progress toward producing a forward-looking term rate has been made in some currencies, such as GBP, but the divergent timelines and approaches across jurisdictions pose a challenge. It is important to continue to monitor progress in the endorsement of the SOFR forward-looking term rate, and to evaluate the viability of other USD benchmark alternatives.
The findings from this study outline the roadmap for how to approach the transition over the next six months. It is important for banks to continue to track currency-specific transition deadlines, intensify internal system and process preparations, and enhance and tailor communication with corporate clients. Taken together, these steps will help to ease some of the uncertainty and pave a more solid path toward transition.