India's biggest public sector bank SBI (File image)
The country’s largest lender State Bank of India (SBI) on March 16 said it had inked the first deal in the external commercial borrowing (ECB) market using the new Secured Overnight Financing Rate (SOFR). SBI and Indian Oil Corporation (IOCL) have inked a $100 million deal for five years, the bank said in a statement.
SOFR is the new alternative benchmark rate which will replace LIBOR (London Interbank Offered Rate), which is the existing benchmark rate. SOFR will replace LIBOR by end of 2021. The sunset has been triggered by the decision of Financial Conduct Authority (FCA) in the UK not to compel contributing banks for LIBOR calculation after December 2021.
“It is the first SOFR deal in the ECB space and the transaction demonstrates SBI’s position as a leader in aligning its systems and processes to embrace Alternate Reference Rates (ARRs),” said C Venkat Nageswar, Deputy Managing Director (International Banking Group).
“IOCL, the largest public sector Oil Marketing Company in India, by availing the first SOFR linked ECB, will set the pace for smooth transition by Indian Corporates to ARR mechanism,” Nageswar said.
“This is a first step, albeit an important one, in our quest to gear up for the impending transition from LIBOR to Alternate Reference Rates. This will also facilitate in efficiently tapping the funding opportunities provided by the ECB market in future,” said Sandeep Kumar Gupta, Director (Finance), IOCL.
On January 20, SBI said it executed two inter-bank short-term money market deal with pricing linked to SOFR. Similarly, on January 21, ICICI Bank said it executed the first interbank money market transaction linked with SOFR. The transaction, executed through the Bank’s Hong Kong branch, is part of the Bank’s Benchmark Transition Management plan to assess the preparedness towards a smooth transition to the new Alternative Reference Rates (ARRs), the bank said.
The FCA said the LIBOR will cease to exist immediately after December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings and immediately after June 30, 2023, in the case of the remaining US dollar settings. After these dates, the representative LIBOR rates will no longer be available.
The FCA is the conduct regulator for nearly 60,000 financial services firms and financial markets in the UK and the prudential supervisor for 49,000 firms, setting specific standards for 19,000 firms. Further, the FCA has confirmed it does not expect any LIBOR settings to become unrepresentative before these intended cessation dates, given the undertakings received from the panel banks.