Changes to IBORs – What you need to know

For more information on the financial terms used in this article, please consult the glossary.

This year, some of the key interest rates that are used as reference points in financial markets are changing.

Interbank Offered Rates (IBORs), including the London Interbank Offered Rate for Euros (Euro LIBOR), are being reformed or replaced by alternative interest rates that are similar, but calculated differently. Because IBORs are market standards that are used very widely, there will be some knock-on effects.

M&G has a company-wide project team to manage the transition to replace interest rates and to ensure the changes are smooth and have as little effect on investors as possible. We expect any effect of these changes on the value of investments we manage to be minimal.

Importantly, you do not need to take any action. We will communicate to you any planned changes to objectives of funds you are invested in before they take effect.

Here are answers to some of the questions you may have about these changes.

What are IBORs?

Euro LIBOR and the other IBORs (Interbank Offered Rates) are families of interest rates at which banks are prepared to lend money to each other as they need it.

The rates have been a mainstay of financial markets for more than three decades, and are provided for a number of currencies and across a number of defined time periods. Each rate is calculated based on quotes provided by a panel of banks for a number of major currencies.

Why are they important?

Many financial contracts reference one or another IBOR rate as their benchmark – for determining interest payments, for instance. This includes certain types of bonds, where the value of the asset or the cashflow it generates are specifically linked to an IBOR.

What is changing?

Euro LIBOR and similar IBORs are being reformed or replaced. Each country’s or region’s authorities have selected the preferred replacement rate, or rates, for their currency and market. In most cases, the replacement rates will be highly regarded interest rates that are already in widespread use.

In Europe, the authorities have decided to replace Euro LIBOR and EONIA with a new rate, the Euro Short Term Rate (ESTR). Another of the main interest rates, EURIBOR, has been reformed, rather than replaced.

Why is it happening?

Financial regulators want standard measures of market interest rates to be trusted and relevant, and for the process used to calculate them to be credible, transparent and robust for the long term. In recent years, the reliability of the process of setting those rates has been under pressure so financial regulators globally sought to improve that.

Whereas many IBORs arise from quotes provided by a panel of banks, regulators want benchmark rates to be both administered by central banks and based on large numbers of transactions.

When are these changes happening?

Between now and the end of 2021, markets and participants are expected to continue gradually shifting and adopting the replacements for IBORs fully. This includes financial institutions amending any Euro LIBOR-linked funds and products to reference ESTR instead, for instance.

Reforms to EURIBOR’s methodology have been completed already.

What is M&G doing?

M&G has put in place significant resources to make the transition to replacements for IBORs as smooth as possible and with minimal effect on our clients. The M&G project team is focused on:

• Identifying and managing the effect of changes on the assets we manage, some of which will be linked to IBORs
• Identifying and understanding the effect on our products, including where IBORs are used as a benchmark for investment performance
• Identifying and understanding their effect on our operations and systems, including those of our third-party suppliers
• Actively participating in industry engagements on the transition, including maintaining a close and continuous dialogue with regulators
• Actively managing risks that arise from the transition

How will it affect M&G funds?

There are two main ways that M&G’s retail funds may be affected by the change from the existing IBOR rate.

Firstly, where a fund holds investments where the value of assets, or cashflows they generate, are currently specifically linked to an IBOR. Such assets include floating rate notes or asset-backed securities that several of our fixed income funds invest in, for instance. Over time, these funds will move to holding new assets that are linked to the replacement interest rates.

Secondly, where a fund has a performance benchmark, or an objective, that is linked to an IBOR. This includes some of our funds that target an absolute return (and which therefore do not reference a benchmark). In these cases, we will plan to change the performance benchmark, or the rate stated in the fund’s objective to a suitable alternative. Ultimately, though, we do not anticipate that this will change how any given fund is managed.

We have identified the funds that are likely to be affected by the changes and, where they need to, our products will transition over the course of 2021.

How will M&G communicate these changes?

Our approach will differ by fund, as it depends on the rules that govern changes to our products.

In some cases, we may need to obtain prior client consent to the proposed changes, which will be achieved through a shareholder resolution. Where prior consent is not required, we may communicate details of changes in advance of them taking place.