The Financial Conduct Authority of the U.K. announced that starting January 1, 2022, it will not require member banks to provide LIBOR (London Inter-Bank Offered Rate) pricing. Under the circumstances of LIBOR discontinuation at the end of 2021, Taiwan Central Bank and the Financial Supervisory Commission have reached a consensus and made a press release to call on the Bankers Association to form a working group to propose relevant coping measures to respond to such change and advocate for such change and remind financial institutions of possible risks related to discontinuation of LIBOR, and, at the same time, bring such risks to the attention of clients and investors.

‍

LIBOR was once the most referenced interest rate in the world. Currently, global financial products that are based on LIBOR include derivative financial products, corporate loans, flexible rate bonds, securitized products, etc. With respect to the risks related to discontinuation of LIBOR, Taiwan Central Bank and the Financial Supervisory Commission call upon financial institutions to carefully assess related impacts and respond appropriately:

1. Seek a replacement interest rate benchmark and draft up a plan for switching. Currently, the competent authorities over the five underlying currencies of LIBOR (USD, EUR, GBP, JPY and CHF) have proposed possible alternative benchmarks (SOFR, €STR, SONIA, TONA and SARON respectively) for the use of market participants.
2. Examine existing contracts that are based on LIBOR and communicate with clients and trading counterparts who may be affected in order to negotiate an amendment to the contract.
3. Discern possible risks involving discontinuation of LIBOR and the switch to other benchmarks, including impacts to business processes, accounting and tax operations, risk assets and capital accrual models, information systems, etc., and formulate adjustment plans and review them regularly.

‍

It is expected that the Bankers Association will propose coping measures to discontinuation of LIBOR at the end of March and reports such measures to the Financial Supervisory Commission and Taiwan Central Bank. Currently, the most promising alternative is SOFR (Secured Overnight Financing Rate). Compared to LIBOR, SOFR is published by the Federal Reserve Bank of New York and is based on the actual overnight transactions of financial companies. It borrows cash using US Treasury bonds or government obligations as collateral. Its advantage lies in the higher degree of difficulty to be manipulated manually, while its disadvantage is being highly volatile.

‍