sajm






Indian Financial System’s Readiness for LIBOR-to-SOFR Transition: An Analytical Study

Shweta Jain* and Shaunak Mainkar**

DOI: https://doi.org/10.62206/sajm.31.5.2024.121-149

PUBLISHED :29 JAN 2025

Abstract

Since the 1980s, LIBOR has been a key lending standard, with contracts worth over $350 tn tied to it globally. However, scandals, lack of transparency, reduced interbank borrowings, and market disruption in 2012 have diminished trust in this widely used benchmark rate. The transition from LIBOR to Alternative Reference Rates (ARRs), particularly SOFR, presents significant challenges and opportunities for the financial industry globally and in India. This comprehensive document outlines the modus operandi of SOFR, discusses the challenges and policy implications of the transition, assesses the readiness of the Indian financial system, and highlights implementation readiness and execution strategies. Recommendations include key considerations and steps to prepare for the transition and to mitigate potential disruptions, emphasizing stakeholder awareness, risk assessment, proactive communication, and effective risk management. This paper provides a concise overview of the document’s contents, addressing critical aspects of the LIBOR transition and the necessary actions for a smooth shift to ARR- based benchmarks.

Key Words

Alternative reference rate, Interest-rate benchmark, LIBOR, SOFR, Transition- issues

Author Biography

Shweta Jain*
Associate Professor, Institute of Management Development & Research, Institute of Management Development & Research, DES Campus, Agarkar Road, Deccan Gymkhana, Pune-411 004, India. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Shaunak Mainkar**
Assistant Professor, Institute of Management Development & Research, Institute of Management Development & Research, DES Campus, Agarkar Road, Deccan Gymkhana, Pune-411 004, India. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

References

  1. Alternative Reference Rate Committee. (2019). Summary of ARRC’s LIBOR fallback language. Link
  2. Alternative Reference Rate Committee. (2021). ARRC Formally Recommends Term SOFR, July 29, 2021. Link
  3. Axis Bank. (2021). Axis Bank Emerges the Pioneer in SOFR-Based Trade Transaction Among Indian Private Sector Banks [Press Release], October 5. Link
  4. Chherawala, T. (2023). End of the LIBOR Era and the Road Ahead for Financial Markets. NIBM Working Paper Series: Policy Research Paper. [Working Paper No. 25] WP25 / May. Link
  5. Deloitte. (2018). LIBOR Transition: Global Interest Rate Benchmark Reform. Risk Advisory. Link
  6. Dhar, S. (2020). The End of the Road for LIBOR: Handling the Impact on the Financial World. Tata Consultancy Services [White Paper]. Link
  7. DBS Bank. (2021). DBS Bank India completes maiden active loan switch ahead of LIBOR transition, October 25. Link
  8. FasterCapital. (2023). LIBOR to SOFR transition: The evolution of the benchmark curve. Link
  9. Financial Stability Board. (2021). Global Transition Roadmap for LIBOR, June 2. Link
  10. Financial Stability Board, Market Participants Group on Reforming Interest Rate Benchmarks Final Report (2014). Link
  11. General Incorporated Association JBA TIBOR Administration (2015). Promoting the JBA Tokyo Inter Bank Offered Rate “JBA TIBOR” Reforms, (2nd Consultative Document) August 28, 2015. Link
  12. Held, M. (2019). SOFR and the transition from LIBOR [Speech transcript], February 26. Remarks presented at the SIFMA C&L Society February Luncheon, New York City. Federal Reserve Bank of New York. Link
  13. Hemachandran, V. (2020). Libor: The Rise and the Fall. RBI Bulletin, Financial Markets Regulation Department, November. Link
  14. Hongkong Monetary Authority(2019). Reform of Interest Rate Benchmarks. Link
  15. Huan, Xing., Parbonetti, Antonio., & Previts, Gary. (2022). Understanding the LIBOR scandal: The historical, the ethical, and the technological. Journal of Banking Regulation, 24(3), 1-17, July 2022, DOI:10.1057/s41261-022-00205-4, Link
  16. ICICI Bank. (2021). ICICI Bank Executes SOFR-Linked Transactions, October 7. Retrieved from Link
  17. McCormick, L., & James, H. (2019). ECB begins transition of benchmark short-term interest rate. Bloomberg. Link
  18. New York Federal Reserve. (2019). ARRC SOFR Checklist. Link
  19. Rebello, J. (2024). HDFC Bank raises $500 million from MUFG. Economic Times, January 16. Link
  20. RBI. (2023). Cessation of LIBOR: Complete Transition [Press release], May 12. Link
  21. Sankar, T. R. (2022). Financial benchmarks in India: A coming of age. RBI Bulletin, December. Link
  22. Scott O’Malia., & Katherine, Darras. (2017). ISDA’s benchmark initiatives, International Swap and Derivative Association. Link
  23. Shiva, Iyer. (2021). Impact of IBOR transition on NBFCs in India. EY India Financial Accounting Advisory Services (FAAS) Partner. Link
  24. SIX Group. (2009). About Swiss Reference Rates (SARON). Link
  25. Skov, J. B., & Skovmand, D. (2023). Decomposing LIBOR in transition: Evidence from the futures markets. Quantitative Finance, 23(6), 959-978. Link
  26. Tabb, R., & Grundfest, J. (2013). Alternatives to LIBOR. Capital Markets Law Journal, 8(3), 229-260. Link
  27. The Hindu Business Line. (2021). Yes Bank Executes Its First Trade Borrowing Transaction Linked to SOFR, April 9. Link
  28. Union Bank of India. (2022). Union Bank of India embraces alternate reference rate replacing LIBOR [Press Release], January 5. Link
  29. World Bank. (2021). World Bank Approves New Reference Rates for Existing and New Loans in Preparation for End of LIBOR [Press release], July 22. Link