Transition from IBORs

Last updated 10 December 2020

What are IBORs?

• IBORs (Inter Bank Offer Rates) are financial benchmarks showing the average interest rates at which major banks can borrow money from each other. They are forward-looking interest rates with loan timescales ranging from overnight to 12 months.
• IBORs exist in multiple different currencies. One of the most commonly used is the London InterBank Offered Rate, or LIBOR; this is the interest rate at which UK banks can borrow from one another in sterling. USD LIBOR is the rate at which banks can borrow from each other in US dollars.
• IBORs are also used as a reference rate for other financial products. For example, one of Artemis’ funds uses a LIBOR rate as a ‘target benchmark’ that the fund aims to outperform. And the corporate bonds in which certain Artemis funds invest might use IBOR rates as a reference point for the amount of interest which is payable on the bonds.

What is changing?

• IBORs are to be discontinued by the end of December 2021. As an alternative, new ‘Risk-Free Rates’ (RFRs) have been agreed by central banks in each of the three main currencies - pounds sterling, US dollars and euros.
• In the UK the Bank of England’s Working Group on Sterling Risk-Free Reference Rates has chosen the Sterling Overnight Index Average (SONIA) to succeed sterling LIBOR.
• In the Eurozone, the European Central Bank (ECB) has chosen the Euro Short-Term Rate (€STR) to succeed Euro LIBOR, EONIA and EURIBOR. The ECB started publishing €STR rates in October 2019.
• In the USA the US Federal Reserve has chosen the Secured Overnight Financing Rate (SOFR) to succeed US dollar LIBOR. The Federal Reserve is liaising with the financial services industry through its Alternative Reference Rates Committee (AARC).

When will this happen?

• From 31 December 2021, banks will no longer be obliged to submit IBOR rates to central banks and regulators, effectively discontinuing the rate from this time.
• To avoid any uncertainty caused by the discontinuation of IBORs, transition to the new RFRs should be completed across the financial services industry by the end of December 2021.

How are we managing the transition?

• During the early part of 2019, we set up a LIBOR transition programme to examine the potential impact on Artemis’ funds and our clients. The programme includes representatives from Artemis’ fund management teams and the dealers who place our orders into the market, and from our investment operations, legal, and risk management functions. The working group monitors market and regulatory developments in order to prepare Artemis for an orderly transition and to ensure, so far as possible, that any disruption is minimised and any action we decide to take is in our clients’ best interests.
• As part of the programme, all of our business functions have completed impact assessments for the proposed transition away from LIBOR. Artemis’ exposure to the different LIBOR rates has been considered, both in terms of: (i) Artemis funds themselves (for example, where LIBOR is used as a benchmark which the fund aims to outperform); and (ii) the assets which we manage on behalf of our clients (for example, where LIBOR might be used to calculate the amount of interest payable on a corporate bond). We have also carried out an assessment of the possible effects on the technology which supports our investment activities.
• With the establishment of a governance structure around our transition activity, we are now actively working on our transition plans. This work is intended to ensure that any transition activity which we need to carry out is completed in good time ahead of 31 December 2021.

What role are we playing in the transition?

• Artemis is a member of, and maintains close contact with, the Investment Association and other industry groups and will continue to take part in initiatives, working groups, panels and round-tables in order to continue to stay informed on market and regulatory developments across the industry in general and to plan our transition away from IBORs ahead of December 2021.

How will it affect Artemis funds?

• Some Artemis funds specifically refer to IBORs as a benchmark or measure for the fund’s performance (this can also be relevant to the way in which some performance fees are calculated). For each of these funds the transition activities required to change IBOR references to an appropriate RFR benchmark are being planned. We will provide more detailed information during 2021 about the changes which are proposed, as well as explaining why we think that these will be in clients’ best interests.
• For Artemis funds which invest in corporate bonds, we have assessed the IBOR exposures relevant to each underlying portfolio. Our investment teams are continually assessing exposure to bonds which use IBORs. Where possible, we will work with bond issuers and other interested parties (including regulators and governments) to support the agreement of changes to the interest calculation methodology so that references to IBORs in bonds in which we invest can be replaced with appropriate RFRs. If that is not possible, we will assess whether there is likely to be unacceptable risk associated with continuing to invest in these bonds. If so, we might elect to proactively transition portfolios away from bonds which use IBORs in their interest calculation methodology.

Do you need to do anything?

• You do not need to take any action at this stage.
• We will provide further information during 2021 to describe any changes which we propose to make and enable clients to consider the options available.