Term reference rate for trade finance and export finance solutions

The Banking Commission IBOR working group has issued a consultation paper with recommendations on term reference rate

17 March 2020

The Interbank Offered Rate (IBOR) is a widely used benchmark for many differing financial arrangements. Of particular note is its use in Trade Finance and Export Finance transactions. Trade Finance comprises of working capital and risk-mitigating solutions used by corporates and financial institutions. Trade finance exposures are diverse in nature, typically smaller in value, shorter in tenor, self-liquidating and exhibit different behaviour and payment patterns from other working capital solutions. Export Finance, which involves risk mitigation from Export Credit Agencies and Multilaterals may be longer in tenor and larger in size, but shares many of the characteristics of the general Trade Finance solutions. In this paper references made to Trade Finance include solutions offered under Export Finance.

It is estimated that 80-90% of global merchandise trade (approx. USD19.48 trillion for the year 2018) is reliant on Trade Finance1. The LIBOR term rates (1 week, 1, 2, 3, 6, and 12 months) are commonly used as the reference rate for short term, fixed interest in advance (discounting) or interest in arrears Trade Finance solutions providing transparency of pricing and certainty of interest costs.

With the regulatory call for a market-wide transition away from LIBOR to Risk Free Rates (RFRs), financial institutions need to be prepared for LIBOR’s demise by the end of 2021. A Working Group (WG), sponsored by the ICC and represented by some of the leading Trade Finance banks, was set up in Nov’19 to consult and provide market views concerning the IBOR transition to the regulatory preferred Risk Free Rates (RFR) committees specifically from the perspective of the Trade Finance industry.

The IBOR Working group drafted this recommendation paper on term reference rate after consultation and feedbacks from banking commission members and national committees. The full paper is available for consultation here.

The full paper is available for consultation here under the “Risk & regulation” section.

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