The RBI by a Circular dated July 8, 2021, notified banks, financial institutions and non-banking financial companies to cease, and encourage their customers to cease, entering into new contracts that reference LIBOR as a benchmark and instead use any widely accepted Alternative Reference Rate (‘ARR’) within certain defined timelines. Through the Circular, the RBI:
i. allowed certain US dollar LIBOR settings to be published till June 30, 2023 for ensuring roll-off of US dollar LIBOR-linked legacy contracts and clarified that contracts referencing LIBOR may be undertaken after December 31, 2021 only for managing risks arising out of LIBOR contracts entered into on or before December 31, 2021;
ii. urged banks and financial institutions to incorporate robust fallback clauses, before the respective cessation dates, in all financial contracts that reference LIBOR and where the maturity date of the contract is after the announced cessation date of the respective LIBOR settings;
iii. directed banks and financial institutions to cease using the Mumbai Interbank Forward Outright Rate (‘MIFOR’), which references the LIBOR, as soon as practicable and in any case by December 31, 2021 and to use daily adjusted MIFOR rates and modified MIFOR rates, published by Financial Benchmarks India Private Limited (‘FBIL’), for legacy contracts and fresh contracts respectively, while also clarifying that banks are allowed to trade in MIFOR only for managing risks arising out of MIFOR contracts;
iv. directed banks and financial institutions to undertake a detailed review of all direct and indirect LIBOR exposures and put in place a framework to mitigate risks arising from such exposures on account of transitional issues including valuation and contractual clauses; and
v. directed banks and financial institutions to have necessary infrastructure in place to be able to offer products referencing the ARR and to sensitize clients about the changes involved to ensure a smooth transition away from LIBOR.